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€  *' 

•  c- 




BY  / 

ELIOT  JONES,  PhD.   ^    ^^^ 

•  t 

FEO^^g&_  OF  BC^jaiQ^    IN   STANyORD    UNIVBSSITy 





Copyright,  193  i. 

Set  up  and  electrotyped.    Published  December,  19a i 


Printed  in  the  United  States  of  America 






This  book  is  a  study  of  the  trust  problem  in  the  United  States. 
It  presents  an  account  of  the  early  devices  employed  to  restrain 
competition,  and  outlines  the  history  and  character  of  the 
modem  trust  movement;  it  describes  a  number  of  representative 
trusts;  it  analyzes  the  reasons  for  the  formation  of  trusts,  and 
their  economic  and  social  consequences;  it  describes  the  trust 
legislation,  the  decisions  of  the  courts  interpreting  it,  and  the 
dissolution  proceedings  brought  imder  it;  and,  finally,  it  consid- 
ers (briefly)  remedies. 

The  book  is  not  a  study  of  all  combinations,  but  merely  of 
those  combinations  that  have  (or  had)  monopolistic  power,  and 
that  are  properly  designated  as  trusts.  It  is  a  study  of  monopo- 
listic aggregations  of  capital  under  unified  management.  It  con- 
tains no  discussion  of  the  experience  of  foreign  countries,  and 
only  a  brief  (incidental)  discussion  of  the  experience  of  our  forty- 
eight  states.  Material  on  these  subjects  was  collected,  but  b 
omitted  from  the  book  for  want  of  space,  and  because  of  a  con- 
viction that  the  trust  problem  is  a  national  one,  to  be  settled  in 
the  light  of  the  conditions  of  our  particular  national  life.  The 
analysis  of  the  six  representative  trusts  is  not  intended  to  be 
complete;  the  aim  has  been  merely  to  present  the  data  in  suf- 
ficient fullness  to  bring  out  concretely  the  reasons  for  forming 
trusts,  the  sources  of  their  monopoly  power,  their  tactics,  and 
their  economic  consequences.  In  general,  the  history  of  indi- 
vidual trusts  is  not  carried  beyond  the  date  of  the  dissolution 
proceedings  instituted  by  the  Department  of  Justice  of  the 
United  States.  Adequate  reliable  data  for  the  subsequent  history 
of  these  trusts  are  not  available;  and,  moreover,  the  purpose  is 
not  to  present  a  complete  history  of  the  representative  trusts, 
but  to  explain  the  national  policy  toward  trusts  as  evidenced 
by  our  laws  and  the  manner  of  their  enforcement. 


viii  PREFACE 

The  outstanding  feature  of  the  trust  problem  is  its  complex- 
ity. In  the  preface  to  an  earlier  book — "The  Anthracite  Coal 
Combination  in  the  United  States" — the  author,  after  a  detailed 
study  of  the  facts  connected  with  a  particular  combination,  took 
occasion  to  emphasize  the  complex  character  of  the  trust  ques- 
tion; and  time  has  only  served  to  deepen  this  early  conviction. 
There  is,  so  it  would  appear,  no  one  solution  of  the  problem; 
for  we  are  confronted  by  a  complex  group  of  issues  that  must  be 
dealt  with  collectively  if  any  solution  is  to  be  had.  The  method 
of  approach  to  this  complicated  problem  has  been  that  of  the  sci- 
entij&c  investigator.  The  author  would  be  neither  advocate  nor 
accuser.  We  are,  in  truth,  in  the  grip  of  mighty  forces, — ^forces 
that  are  modifying  fundamentally  the  world's  organization  of  in- 
dustry; and  he  would  be  rash  indeed  who  would  venture  to  pre- 
dict with  assurance  what  the  immediate  future  holds  in  store 
for  us — ^whether  regulated  competition,  regulated  monopoly,  or 
public  ownership  in  one  form  or  another.  Or  possibly  even  some 
new  untried  venture  into  hitherto  unexplored  economic  fields. 
The  author  is  therefore  content  to  present  primarily  a  record 
rather  than  an  argument — or  a  prophecy. 

Grateful  acknowledgments  are  due  to  my  brothers  Grinnell 
and  Percival,  and  to  Messrs.  J.  S.  Davis,  F.  B.  Garver,  C.  A. 
Huston,  H.  L.  Lutz,  William  Notz,  C.  O.  Ruggles,  F.  W.  Taussig, 
A.  C.  Whitaker,  and  M.  S.  Wildman,  all  of  whom  read  portions 
of  the  manuscript.  But  my  deepest  obligation  is  to  my  father. 
Professor  Richard  Jones,  who  despite  the  demands  of  his  own 
rigorous  intellectual  life  has  given  unstintedly  of  time  and 
counsel,  to  the  end  that  I  should,  with  Shakespeare,  try  to 
*find  where  truth  is  hid,'  and  then  take  lieed  lest  I  *  deliver' 
more  or  less  than  truth. 


Stanford  University 
November,  1920. 





Definition  of  trust i 

Explanation  of  fonns  of  industrial  organization a 

SmaU-scale  production 3 

Laige-sade  production 3 

Combination # 3 

Horizontal 3 

Vertical 3 

Trust 4 

The  problem 5 



Some  early  pools 6 

Definition 6 

Types 7 

Gentlemen's  agreement 7 

Speculative  pool 8 

Regulation  of  the  output 8 

Cotton  bagging 8 

Anthracite  coal 8 

Steel  rail 9 

Wire  nail 10 

Meat-packing 10 

Difficulty  with  this  type  of  pool 11 

Division  of  the  field 12 

Addyston  Pipe  and  Steel  Company 12 

Tobacco 13 

Selling  agency 13 

Michigan  Salt  Association 14 

Continental  Wall  Paper  Company 14 




Patent  pool 15 

Electric. IS 

Bath  tub 15 

Advantages  and  disadvantages  of  pools 16 



Standard  Oil  "trust" 19 

American  Cotton  Oil  and  National  Linseed  Oil "  trusts  " 20 

Distillers  and  Cattle  Feeders*  "trust" 21 

Sugar  Refineries  Company 21 

National  Lead  and  Cordage  "trusts" 22 

State  and  federal  legislation 23 

Decision  in  sugar  "  trust"  case 24 

Decision  in  Standard  Oil  "trust"  case .• 24 

Dissolution  scheme  of  Standard  Oil  Company 25 




New  scheme  to  restrain  competition 27 

Security  holding  company 27 

Proi>erty  owning  company 27 

Holding  company 27 

Explanation  of  the  term 27 

Changes  eflFected 28 

Why  resorted  to? 28 

Why  not  resorted  to  earlier? 29 

Special  cases  of  holding  companies 29 

New  Jersey  legislation 30 

New  Jersey's  example  followed  by  other  states 31 

American  Cotton  Oil  Company 31 

Property  owning  company 31 

Consolidation  or  merger 32 

Purchase  and  sale 34 

Exchange  of  property  for  stock 35 

New  Jersey  legislation 35 

American  Tobacco  Comjjany 36 

American  Sugar  Refining  Company 36 

Relative  merits  of  seciuity  holding  companies  and  property  owning 

companies 37 

Extent  of  trust  movement 38 


^  PAGE 

Early  history 46 

Organization  of  Standard  Oil  Company  of  New  Jersey 56 

Proportion  of  output  controlled 58 

Sources  of  monopoly  power 60 

Control  of  crude  oil  output 60 

Efficiency 61 

Economies  of  trust  form  of  organization 62 

Ownership  of  pipe-lines 66 

Railroad  discriminations 72 

Unfair  methods  of  competition  in  selling 77 

Prices .' 83 

Profits 87 



History  of  acquisition  of  cane  sugar  companies 92 

Acquisition  of  beet  sugar  interests * 102 

Proportion  of  output  controlled 105 

Sources  of  monopoly  power ' 108 

Economies  of  trust  form  of  organization 108 

Control  of  raw  material no 

Patents in 

Abuses Ill 

Tariff Ill 

Underweighing 113 

Railroad  rebates 114 

Purchase  of  competitors 115 

Prices 116 

Profits 119 




Organization  of  cigarette  trust 123 

Organization  of  plug  tobacco  trust 1 26 

Organization  of  smoking  tobacco  trust 129 

Organization  of  fine-cut  tobacco  trust 130 

Organization  of  snuff  trust 130 



Attempt  to  establish  a  dgar  trust 131 

Consolidated  Tobacco  Company 133 

British-American  Tobacco  Company 134 

American  Tobacco  Company  (1904) 136 

Proportion  of  output  controlled 138 

Cigarettes  and  little  cigars 138 

Plug  tobacco 141 

Smoking  tobacco 142 

Fine  cut  tobacco 143 

Snuff 143 

Cigars 143 

Sources  of  monopoly  power 143 

Leaf,  licorice,  etc 143 

Railway  rebates 145 

Tariff 145 

Economies 146 

Size  of  plants 146 

Cigarettes 146 

Plug  tobacco.% 147 

Smoking  tobacco 148 

Snuff 148 

Cigars 148 

Selling  and  advertising  costs 149 

Purchase  of  supplies 150 

Patents 150 

Local  price  discrimination — bogus  independents 151 

Jobbing  business 152 

United  Cigar  Stores  Company 153 

Summary — Purchase  of  competitors  real  cause;' 153 

Prices 154 

Profits 161 




Organization  of  United  Shoe  Machinery  Company 165 

Proportion  of  industry  controlled 165 

Sources  of  monopoly  power 167 

Original  act  of  combination 167 

i  Shoe  machinery  leases 171 

'  Advantages  of  leasing  system 174 

'Analysis  of  tying  clauses  and  their  effects 174 

Attitude  of  shoe  machiner>'  manufacturers 1 76 



Excellence  of  machines  and  service 178 

Effect  of  monopoly  on  inventive  progress 178 

Plant  episode 180 

Royalties 183 

Profits 184 




History  of  iron  and  steel  industry  to  1898 i 

Combination  movement,  1898-1900 189 

Description  of  combinations  of  1898-igoo 190 

Explanation  of  the  movement 196 

Organization  of  United  States  Steel  Corporation 200 

Reasons  for  its  formation 200 

Restriction  of  competition 200 

Promoters*  profits 203 

Eomomies 204 

Importance  of  the  Corporation  in  1901 206 

Extent  of  overcapitalization 207 

Subsequent  additions  to  investment 208 

Profits. 210 

Proportion  of  output  controlled 213 

Explanation  of  failure  to  maintain  its  relative  position 218 

Control  of  iron  ore  deposits 222 

Ownership  of  iron  ore  railroads 223 

Cooperation  in  fixing  prices 225 




Organization  of  International  Harvester  Company 231 

Severity  of  competition 232 

i  Integration 234 

^Development  of  foreign  trade 235 

Promoters*  profits 235 

Absence  of  overcapitalization 236 

Extension  of  its  business 237 

Acquisition  of  competing  concerns 237 

Acquisition  of  noncompeting  lines 238 

Organization  of  International  Harvester  Corporation 239 

Organization  of  International  Harvester  Company  of  America 240 



Proportion  of  output  controlled 242 

Sources  of  monopoly  power 247 

Economical  production 248 

Large  financial  resources 251 

Competitive  practices 251 

Prices 254 

Profits 257 




Introductory 260 

Teaching  of  experience 261 

I  Oil  trust 261 

JjSugar  trust '262 

*Steel  trusts 263 

Tobacco  trusts. 266 

Harvester  trust 267 

Whisky  trusts 268 

Significance  of  overcapitalization 269 

*  Steel  trusts 270 

Tobacco  trusts 270 

Miscellaneous  trusts 271 

Significance  of  the  protective  tariff 273 

General  reasoning 274 

♦  Law  of  monopoly  price 274 

•  How  does  monopoly  price  compare  with  competitive  price? 275 

Restraints  on  high  prices  of  trust  controlled  articles 276 

Potential  competition 276 

Substitutes 278 

Balance  of  power  among  trusts. 278 

Public  opinion  and  legislation 279 

Sense  of  equity  and  reasonableness 280 

Inert  management 280 

Difficulty  of  determining  most  profitable  price 281 

Conclusion 281 

-,      CHAPTER  XII 


Function  and  work  of  the  promoter 283 

Profits  realized  by  promoters  of 285 

Iron  and  steel  combinations  and  trusts,  1898-1900 285 




United  States  Steel  Corporation,  1901 288 

Tobacco  trusts,  1890-1904 289 

American  Can  Company,  1901 292 

International  Harvester  Company,  1902 293 

Miscellaneous  trusts,  1890-1901 296 

Trusts  in  organization  of  which  promoters'  profits  were  absent 298 

Condusbn 299 

v/  CHAPTER  Xni 


'    Introductory 300 

Early  cases 300 

Agreements  to  restrict  competition 302 

Invalid  agreements 302 

India  Bagging  Association  v.  B.  Kock  and  Company 302 

Morris  Run  Coal  Company  v.  Barclay  Coal  Comi>any 303 

The  Central  Ohio  Salt  Company  v.  Guthrie 304 

Rajrmond  v.  Leavitt 304 

De  Witt  Wire-Cloth  Company  v.  New  Jersey  Wire-Cloth 

Company 305 

Chapin  v.  Brown  Brothers 305 

More  V.  Bennett 306 

State  of  New  York  v.  The  Milk  Exchange 306 

Slaughter  t».  Thacker  Coal  and  Coke  Company 307 

Valid  agreements 308 

Skrainka  v.  Scharringhausen / 308 

Dolph  V.  Troy  Laundry  Machinery  Company 309 

Central  Shade-Roller  Company  v.  Cushman 310 

Trustee  device  cases 311 

MaDoiy  v.  Hanaur  Oil- Works 311 

State  V.  Nebraska  Distilling  Company 312 

State  of  New  Yoric  v.  North  River  Sugar  Refining  Company 313 

State  r.  Standard  Oil  Company 314 

Corporate  combination  cases 315 

Richardson  v.  Buhl 315 

Distilling  and  Cattle  Fading  Company  v.  People 316 

I  C 

-   V 



I    Ihtioductory 318 

Sherman  Act  (1890) 3^9 

Wilson  tariff  Act  (1894) 322 



Discussion  and  agitation  (1895-1903) 323 

Act  to  expedite  trust  cases  (1903) 326 

Act  to  create  Bureau  of  Corporations  (1903) 327 

Further  discussion  of  legislative  policies 328 

Act  to  expedite  trust  cases  amended  (1910) 330 

Act  to  provide  for  publicity  in  taking  evidence  {1910) 330 

Miscellaneous  legislation 331 




Legislative  history 333 

Introductory 333 

Message  of  the  President 335 

Course  of  the  Trade  Commission  bill  through  Congress 338 

Course  of  the  Clayton  bill  through  Congress 341 

The  Trade  Commission  Act 342 

Organization  of  the  commission 343 

Powers  and  duties 343 

Investigation 344 

Compilation  of  information 344 

Filing  of  annual  and  special  reports  by  corporations 344 

Classification  of  corporations 346 

Investigation  of  alleged  violations  of  anti-trust  acts 346 

Recommendations  for  adjustment  of  business  of  corpora- 
tions alleged  to  be  violating  anti-trust  acts 346 

Preparation  of  decrees  in  suits  in  equity 347 

Investigation  of  observance  of  decrees 348 

Investigation  of  trade  conditions  in  foreign  countries. . . .  349 

Publication  of  information  collected  by  it 349 

Submittal  of  annual  and  special  reports  to  Congress 349 

Recommendations  for  additional  legislation 349 

Prevention  of  unfair  methods  of  competition  in  commerce.. . .  350 

Miscellaneous  provisions 355 

The  Clayton  Act 357 

Set  of  poative  prohibitions 357 

Local  price  discrimination 358 

Tying  contracts 360 

Holding  companies 363 

Interlocking  directorates 364 

Remedies 366 

Enforcement  through  a  commission 366 

Individual  suits  for  three-fold  damages 367 



Suits  brought  by  the  government 369 

Individual  suits  for  injunctive  relief 370 

Labor  provisions 371 

v^       CHAPTER  XVI 


Conditions  that  gave  rise  to  a  demand  for  such  legislation 374 

Competition  of  combinations  of  foreign  producers 374 

Competition  of  foreign  export  associations 375 

Combinations  of  foreign  buyers 377 

Miscellaneous  obstacles  to  development  of  American  export  trade.  377 

Progress  of  the  bill  through  Congress 378 

Provisions  of  the  act 381 

Possible  objections  to  the  legislation 386 

Restriction  of  competition  in  the  domestic  market 386 

Promotion  of  international  combinations 386 

Extension  of  foreign  combinations 387 

International  friction. 387 



U.  S.  V,  E.  C.  Knight  Company 388^ 

U.  S.  V,  Trans-Missouri  Freight  Association 391 

U.  S.  V,  Joint  Traffic  Association 394 

Addyston  Pipe  and  Steel  Company  ».  U.  S 395 

Bement  v.  National  Harrow  Company 398 

Northern  Securities  Company  r.  U.  S 399 

Swift  and  Company  t».  U.  S 403 

Loewe  v,  La^or 405 

Standard  Oil  Company  r.  U.  S 406 

U.  S.  V,  American  Tobacco  Company 413 

Henry  v.  A.  B.  Dick  Company 419 

U.  S.  V.  Su  Louis  Terminal  Association 422 

Standard  Sanitary  Manufacturing  Company  v.  U.  S 424 

U.  S.  V,  Reading  Company 426 

U.  S.  V.  Patten 429 

U.  S.  V,  Winslow 431 

U.  S.  V.  United  Shoe  Machinery  Company 432 

U.  S.  V,  International  Harvester  Company 435 

U.  S.  V.  Com  Products  Refining  Company 436 

U.  S.  V,  United  States  Steel  Corporation 43^ 


xviii  CONTENTS 




Record  of  the  administrations 441 

Benjamin  Harrison 441 

Grover  Cleveland 442 

William  McKinley 443 

Theodore  Roosevelt 443 

William  Howard  Taf  t 444 

Woodrow  Wilson 445 

Trust  dissolutions 445 

The  oil  trust 445 

The  plan  of  dissolution 445 

Ineffectiveness  of 447 

Recommendations  of  Federal  Trade  Commission 451 

The  tobacco  trust 452 

Introductory 452 

Provisions  of  the  decree 454 

Defects  of  the  decree 461 

Investigation  of  Federal  Trade  Commission  into  efifectiveness 

of  the  dissolution 470 

The  powder  trust 474 

The  shoe  machinery  trust 475 

The  cash  register  trust 477 

The  harvester  trust 47q 

The  glucose  trust 484 

^  The  meat  combination 485 

.  The  steel  trust 490 

Consent  decrees 490 

.  The  aluminum  trust . . . ., 490 

Miscellaneous  concerns 492 

Suits  pending 493 

Explanation  of  comparative  failure  of  trust  dissolution  proceedings 494 

Accomplishments 497 




Introduction 499 

Economies  in  bargaining 500 

Purchase  of  materials  and  supplies 500 

Distributors 503 




Labor 504 

Fmandal  institutions 505 

Railroads. 505 

Economies  in  production 506 

Continuous  operation  of  plants 506 

Specialization  of  plants  and  machinery 509 

Specialization  of  ability 510 

Employment  in  each  plant  of  the  best  devices,  including  patents 510 

Competition  between  plants 513 

Utilizatbn  of  by-products 514 

Insurance 515 

Smaller  fixed  charges  per  unit  of  product 515 

Economies  in  selling , 517 

Advertising 517 

Traveling  salesmen 520 

Export  trade 522 

Cross  freights 528 

Bad  debts 529 

Smaller  stock  of  goods 530 

Disadvantages  of  the  trust  form  of  organization 530 

Scarcity  of  high  grade  administrative  ability 530 

Difficulty  of  enlisting  best  services  of  operating  officials 533 

Tendency  of  monopoly  toward  stagnation 534 

Additional  financial  outlays  to  which  trusts  are  subjected 536 

Burden  of  highly  centralized  administrative  machinery 537 

Record  of  trust  faOures 538 

Kiplanation  of  trust  successes 539 



Introductory 542 

Meaning  of  the  term  "fair  price" 542 

Hof^  determine  a  fair  price 543 

Determination  of  costs  of  production 544 

Uniform  costs 544 

Varying  costs 545 

Separate  price  for  each  producer 545 

Price  adjusted  to  marginal  cost 546 

Treatment  of  joint  costs 547 

Necessity  of  frequent  determination  of  costs 548 

Determination  of  a  fair  rate  of  profit 550 

Determination  of  the  investment 551 



Regulation  of  profits  rather  than  prices 552 

Additional  consequences  of  price  fixing  policy 553 

Regulation  of  prices  of  raw  materiab 553 

Regulation  of  wages 554 

Regulation  of  dealers'  margins 555 

Government  ownership 556 

Reduced  efficiency 556 

Miscellaneous 557 

Extension  of  government  authority 557 

Analogy  of  Interstate  Commerce  Commission 558 

Conclusion 559 



•#  Conclusion 562 


Index. 587 


♦  •   •• 



•  -• 

-    •  *  •   fc 

tF         «>  V      k       b 



,         CHAPTER  I 


The  term  "  trust "  in  everyday  speech  is  quite  loosely  used,  and 
it  consequently  conveys  a  different  idea  to  different  people.  It 
is  thus  essential  at  the  outset  to  indicate  clearly  the  sense  in 
which  the  word  is  used  in  this  book. 

The  trust,  as  the  term  is  here  employed,  means  industrial 
monopoly.  TTHoes  not  include  monopolies  (whether  railroad 
or  other  j  m  the  so-called  public  service  industries.  Nor  does  it 
include  pook,  trade  associations,  and  other  organizations  which, 
though  they  may  temporarily  possess  some  power  over  prices,  do 
not  interfere  with  the  substantial  independence  of  the  concerns 
involved.  Yet  neither  is  the  term  limited  to  the  earlier  and 
narrower  concept  of  monopoly  as  an  exclusive  legislative  or 
executive  grant.  A  trust  (industrial  monopoly)  may  besaid  to 
exist  when  a  person,  corporation,  or  combination  owns  or  controls 
enough  of  the  plants  producing  a  certain  article  tobe  able  for  all 
'practical  purposes  to  fix  Its  price.  Control  over  the  price  is  the 
fundamental  test  of  liionopoIyTTt  is  its  essential  and  character- 
istic feature.  Just  what  percentage  of  the  business  must  be 
handled  by  a  trust  in  order  that  it  may  be  able  to  determine 
the  price  of  a  given  article  can  not  be  stated  with  precision,  yet 
it  seems  fairly  certain  that  as  a  general  rule  the  production  of 
from  70  to  80  per  cent  of  the  national  supply^  and  possibly  even 
less,  is  quite  ample  for  price  control.  As  was  said  by  Mr.  H.  O. 
Havemeyer,  long  the  head  of  the  sugar  trust:  "It  goes  without 
saying  that  a  man  who  produces  80  per  cent,  of  an  article  can 
control  the  price  by  not  producing;  the  price  must  advance  if  he 


does  not  produce;  and  it  must  decline  if  he  does  produce,  if  he 
produces  more  than  the  market  will  take.  "*  The  term  trust  or 
industrial  monopoly,  therefore,  is  not  identical  with  complete 
monopoly;*  for  without  an  exclusive  grant  of  privileges  a  com- 
plete monopoly  is  not  likely  to  exist,  unless  it  be  based  upon  the 
sole  possession  of  a  limited  natural  resource. 

The  concept  of  industrial  monopoly  here  defined  has  been 
clearly  described  by  the  Supreme  Court  of  the  United  States.  In 
National  Cotton  Oil  v.  Texas,  the  Court  said:  '*The  idea  of 
monopoly  is  not  now  confined  to  a  grant  of  privileges.  It  is 
understood  to  include  a  'condition  produced  by  the  acts  of  mere 
individuals'.  Its  dominant  thought  now  is,  to  quote  another, 
*the  notion  of  exclusiveness  or  unity';  in  other  words,  the 
suppression  of  competition  by  the  unification  of  interest  or 
management,  or  it  may  be  through  agreement  and  concert  of 
action.^  And^  the  purpose  is  so  definitely  the  control  of  prices 
that  monopoly  has  been^elined  to  be  *unified_  tactics  wi^j-e- 
gard  to  prices.'  It  is  the  power  to  control  prices  which  makes 
the  inducement  of  combinations  and  their  profit."* 

Just  what  is  meant  in  this  book  by  a  trust  may  be  made 
clearer  perhaps  by  differentiating  it  from  other  forms  of  indus- 
trial organization.  While  there  are  many  types  of  manufactur- 
ing organization,  for  the  purpose  of  clarifying  the  idea  of  the 
trust  we  need  distinguish  but  four:  first,  small-scale  production; 
second,  large-scale  production;  third,  production  by  a  group  of 
plants  united  in  a  combination;  and,  fourth,  production  by  a 

In  the  manufacture  of  many  commodities,  as  is  well  known, 
small-scale  operations  still  prevail.    The  following  industries 

*  Lexow  Report  (New  York),  1897,  p.  iii. 

*  In  Patterson  ».  United  States,  222  Fed.  Rep.  619,  the  Circuit  G)urt  said: 
*'To  monopolize  trade  or  commerce,  or  a  part  thereof,  is  to  exclude  persons 
therefrom.  It  is  not,  however,  to  exclude  all  persons."  Were  all  persons 
to  be  excluded,  the  result  would  be  a  perfect  monopoly,  which  in  experience 
has  arisen  only  from  a  sovereign  grant  (p.  619). 

*The  suppression  of  competition  through  agreement  merely  does  not 
come  within  the  author's  definition  of  a  trust. 

*  197  U.  S.  129. 


will  serve  as  examples:  cigar,  beet  sugar,  brick,  gunpowder, 
bread,  butter,  cheese,  ice  cream,  and  fruit  and  vegetable  can- 
ning. In  the  manufacture  of  a  large  number  of  other  conmiod- 
ities,  the  size  of  the  plant  unit  has  greatly  increased.  As  exam- 
ples may  be  cited  the  following:  oil,  iron  and  steel,  hard  coal, 
soft  coal,  cane  sugar,  cigarettes,  shoes,  textiles,  automobiles, 
harvesters,  cash  registers,  shoe  machinery,  and  meat.  Experi- 
ence has  clearly  proven  that  the  articles  mentioned,  as  well  as 
many  others,  can  be  produced  more  economically  in  large  fact- 
ories than  in  small  ones.  It  should  be  borne  in  mind,  however, 
that  what  is  considered  a  large  factory  in  one  industry  would  be  a 
small  unit  in  another  industry.  A  $6,000,000  cotton  mill,  for 
example,  would  be  regarded  as  a  large  plant,  whereas  a  $6,000,- 
000  steel  mill  would  be  a  small-scale  operation. 

The  combination  frequently  represents  a  third  stage.  A  num- 
ber of  factories^  each  of  which  may  have  already  increased  the 
size  of  its  plant  to  the  most  economical  imit  from  the  standpoint 
of  production,  may  combine  in  order  to  secure  the  economies  of 
large-scale  management,  in  addition  to  the  economies  of  large- 
scale  production.  This  combination  may  be  of  two  sorts.  It 
may  be  a  combination  horizontally  (so  to  speak)  or  a  combin- 
ation vertically.  /^  horizontal  combination  is  one  that  brings 
together  under  a  single  management  several  plants  producing  the 
same  article,  as,  for  example,  a  combination  of  fertilizer  plants. 
i/A  vertical  combination  is  one  that  brings  together  a  nimiber  of 
plants,  each  of  which  concerns  itself  with  a  separate  stage  in  the 
production  of  the  finished  product.  This  is  what  is  known  as 
the  integration  of  industry.  As  an  illustration,  a  combination  of 
a  coal  mine,  an  iron  ore  mine,  a  blast  furnace,  a  steel  mill,  and  a 
steel  rail  mill,  is  a  vertical  combination.  Such  a  combination  has 
its  advantages,  as  it  assures  the  manufacturer  of  steel  rails  an 
ample  supply  of  raw  materials  at  a  reasonable  price.  The  com- 
bination horizontally  also  has  its  advantages,  as,  for  example,  a 
saving  in  freight  rates.  A  company  with  one  plant  at  New  York 
and  another  at  Chicago  can  supply  the  intervening  market  from 
that  plant  which  is  nearest  the  point  of  consumption.  Because 
ci  the  obvious  advantages  of  combination  in  certain  lines  of  in- 


dustry  (of  which  more  later),  this  form  of  organization  has  fre- 
quently been  employed.  The  American  Agricultural  Chemical 
Company  is  an  illustration  of  a  horizontal  combination;  the 
Bethlehem  Steel  Company  an  illustration  of  a  vertical  combina- 
tion. Some  combinations,  both  horizontal  and  vertical,  are 
formed  without  any  thought  of  interfering  substantially  with  the 
operation  of  competitive  forces;  others  are  resorted  to  expressly 
for  that  purpose.  Yet  even  when  the  restriction  of  competition 
is  the  object  of  a  combination,  such  is  not  always  the  result.  The 
early  iron  and  steel  combinations,  for  example,  merely  intensified 
a  competition  that  was  already  quite  active. 

The  fourth  form  of  organization  is  the  trust,  by  which  is  meant 
a  combination  of  a  suflScient  number  of  plants  to  secure  practical 
control  over  the  supply,  and  thus  over  the  price.*  Well-known 
trusts  are  the  Standard  Oil  Company,^  the  American  Tobacco 
Company,^  the  United  States  Steel  Corporation,  the  American 
Sugar  Refining  Company,  the  International  Harvester  Company, 
and  the  United  Shoe  Machinery  Company.  Though  trusts  may 
by  definition  originate  through  internal  expansion,  in  fact  they 
have  come  into  being  almost  entirely  through  an  act  of  combina- 
tion. They  are  thus  horizontal  combinations,  yet  of  so  far- 
reaching  a  character  that  they  secure  dominion  over  the  industry. 
Trusts,  morever,  may  be  vertical  combinations.  Thus,  the 
United  States  Steel  Corporation  is  highly  integrated,  as  are  also 
the  International  Harvester  Company,  the  Standard  Oil  Com- 
pany, and  the  American  Tobacco  Company.  Not  all  combina- 
tions, whether  horizontal  or  vertical,  are  trusts,  however;  it  is 
possible  to  effect  combinations,  both  horizontal  and  vertical, 
that  have  no  semblance  of  monopoly  power. 

*  Mr.  Kales,  adopting  the  phraseology  of  the  Department  of  Justice  in  the 
International  Harvester  Company  case  (Brief  for  the  United  States  in 
United  States  v.  International  Harvester  Company,  no.  56,  pp.  34-101), 
says  that  a  combination  to  be  a  trust  must  embrace  units  which  together 
occupy  a  "  preponderant "  posiUon  in  a  given  industry.  Harvard  Law 
Review,  30,  p.  830. 

•The  situation  prior  to  the  dissolution  decrees  of  191 1  is  here  in  mind. 
Whether  the  oil  and  tobacco  trusts  were  effectively  dissolved  or  not  is  con- 
sidered in  ch.  18. 


The  question  at  issue,  upon  which  it  is  hoped  this  book  will 
throw  light,  is:  what  public  ix)licy  should  be  adopted  toward 
trusts?  Do  trusts  represent  mainly  an  attempt  to  secure  monop- 
oly profits  by  raising  prices,  and  should  they  therefore  be  pro- 
hibited and  the  endeavor  be  made  to  restore  competitive  condi- 
tions so  far  as  possible?  Or  do  trusts  represent  a  more  efficient 
business  oi;ganization,  and  should  they  therefore  be  permitted  to 
exist  subject  to  governmental  regulation  of  their  prices  and  the 
like?  Or,  finally,  isjt  difficult,  if  not  impossible,  torestore com- 
petitive conditions  or  to  regulate  satisfactorily  the  prices  of  trust- 
contr6nea"^rociucts,  and  should  therefore  the  monoix)lized  in- 
dusfries  be  socialized?  It  is  not  assumed  that  this  book  solves 
these  crucial  problems,  yet  it  is  hoped  that  this  presentation  of 
the  facts  may  contribute  toward  their  solution. 


Wh^er  or  no  5uch  was  the  main  reason  for  their  formation, 
the  trusts  have  in  fact  restrained  or  eliminated  competition  in 
their  field.  Yet  some  time  prior  to  the  modem  trust  movement 
attempts  had  been  made  through  other  agencies  to  restrain  the 
free  play  of  competition.  Some  familiarity  with  these  other 
attempts  is  essential  to  an  understanding  of  the  trust  movement. 

The  pool  was  the  first  and  the  commonest  mode  of  restricting 
competition  between  manufactuyers._  A  pool  was  formed  in  the 
bmss  industry  as  girly  as  1853;  ^  and  one  in  the  cordage  industry 
in  1861.^  Yet  until  after  the  Civil  War  combinations  among 
manufacturers  were  few  in  number  and  narrow  in  scope.  The 
inadequacy  of  transix)rtation  facilities,  and  the  comparatively 
small  capital  investment  per  firm,  prevented  manufacturers  from 
reaching  out  to  any  considerable  extent  into  the  territory  of  their 
potential  rivals;  and  there  was  thus  less  occasion  for  association. 
But  with  the  rapid  growth  of  business  after  the  Civil  War  and 
the  development  of  large-scale  production,  keen  competition 
\J  appeared.  To  check  this  competition  pools  were  formed;  and 
they  have  been  numerous  ever  since.  At  the  present  time  they 
are  probably  more  numerous  and  varied  than  ever  beforq.  Even 
some  of  the  leading  trusts,  such  as  the  United  States  Steel  Cor- 
poration, }mmt  had  pooling,  agreements  with  the  independent 
producers;  and  some  pools  ^pe  international  in  scope. 

The  term  pool  as  here  used  is  a  catch-all  for  the  various  Ugree- 
ments  and  associations  whereby  a  number  of  conccmSj,  ea<A 
preserving  its  own_organizatipn  and  to  a  large  degree  its  own 
independence,  adogted^^royisi^ns  looking  toward  the  main- 

*  Lathrop,  The  Brass  Industry,  p.  121. 

•  Dewing,  Corporate  Promotions  and  Reorganizations,  p.  1 14. 



tenance  or  raising;;  of  the  prices  of  the  articles  produced  by  them 
— the  power  actually  to  fix  prices  may  or  may  not  have  been 
conferred  on  a  governing  body — nr^lnnki^g  tow^^*^  ^^^  Hpprp<^ 
sion  of  the  prices  ofjhe  materials  and  supplies  required  by  tjhem. 
rThe  pool  in  the  industrial  world  may  be  compared,  so  far  as  its 
organization  is  concerned,  to  a  League  of  Nations  in  the  political 
work!.  The  members  of  the  pool,  like  the  members  of  the  League, 
^-^retain  full  control  over  certain  matters,  but  temporarily  delegate 
certain  powers  to  a  central  organization.    Upon  the  disbanding 
of  the  pool,  as  upon  the  dissolution  of  th^League,  the  members 
resume  complete  control  over  their  affairs.\y^ 
(Pools  are  of  numerous  kinds,  but  six  leading  types  ^  may  be  dis- 
tinguished: first,  the  gentlemen's  agreement;  second,  the  specula- 
tive pool;  third,  the  regulation  of  the  output  pool;  fourth,  the 
.uiivision  of  tlTC^eld  pool;  fifth,  the  selling  agency;  and,  swA,  the 
patent  pool,  j  ^  -^  <^  ^ 

First.  The  gentlemen's  agreement  is  perhaps  the  loosest  form  \  ^ 
<rf  a  pool.*  As  Its  name  implies  it  is  simply  an  agreement  between 
gentlemen  looking  tossaid  the  control  of  prices.  As  the  agree- 
ment is  between  gentlemen,  no  formal  organization  is  created, 
and  jK>  contracts  or  papers  are  signed.  Under  the  gentlemen's 
agreement  there  is  no  provision  f or  the  payment  of  penalties  in 
the.  event  of  a  violation  of  the  agreement;  such  is  not  assumed 
to  be  necessary,  since  the  members  are  expected  to  abide  faith- 
fi).lly  by  their  informal  promises.    Gentlemen's  agreements  have 

m  very  numerous  in  the  iron  and  steel  industry;  in  fact  at 
[me  time  or  other  they  have  been  found  in  every  branch  of  the 

lustry.'   They  were  employed  also  on  several  occasions  in  the 

^«.  J  No  claim  of  comprehensiveness  or  all-inclusiveness  is  made  for  this  class- 
"  ^hJf^^^^'    ^^  ^^°*^  ^^^  include,  for  example,  those  wholesalers*  or  retailers* 
^Dciations  which  Mr.  Stevens  calls  legitimate  trader  associations.    See 
^*  !erican  Economic  Review,  3,  p.  555. 

in  iSome  authors,  for  example,  Mr.  Haney  (Business  Organization  and  Com- 
ktion,  1915,  p.  146),  do  not  classify  a  gentlemen's  agreement  as  a  pool, 
s  is  because  they  give  to  the  term  pool  a  narrower  and  more  restricted 
54'~Biing  than  is  employed  in  this  text. 

*flcport  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 

P^  I,  p.  75. 
J-    • 



anthracite  industry.^  However,  mere  agreements  rarely  proved 
succ^^ul,  since  there  was  nearly  always  at  least  one  "black 
sheep"  whose  infractions  of  the  agreement  Jed  to  its  abandon- 

Second.  The  speculative  pool,  being  organized  for  speculative 
purposes,  is  a  ternporary  arrangement,  which  is  ordinarily  tjgr- 
mjnated  as  soon  as  the  object  of  the  pool  has  been  attained.  Hm*- 
hafy^e^bo3t  illustration  ofjljis  type^<j(  pool  is^th^Frwith 
Cej^r  Syndicate,' orginia^a  in  pctd^,  1887 •-^l^  syndicate 
entered  into  contracts  with  thej-pfoducers  of  copper  in  other 
countries  for  llie  purchase,  at  a  mgure  somewhat  above  the  mar- 
kettt>rice,  of  all  the  copper  proouced  by  them.  Th^  syndicate 
hop^  to  comer  the  world^s  supply  of  copper,  and  it  the  time 
i  the  contracts  wfcre  entered  into  die  control  from  80  to  85  per  cent 
W  the  total  supbly.  The  financmg  of  these  purchkses  was,  of 
course,  a  difficulAmatter,  particulmy  since  the  output  of  copper 
greatly  increased  imder  the  stimukis  of  abnormally  nigh  prices. 
uWortunately  for  the  syndicate  theke  occurred  a  run  an  the  bank 
which  was  providing  the  funds,  and  as  a  result  the^yndicate 
speedily  collapsed.  Subsequently  the  price  of  copper  fell  much 
below  what  it  had  been  prior  to  the  formation  of  the  podl.^  Be- 
cause of  the  fact  that  speculative  pools  were  tonporaryjn  nataifi 
and  difficult  to  finance^  they  ^t/^e  not  satisfactory  to  the  manu- 
facturers seeking  somC-jievice  whereby  they  mighfj^ffectively 
throttle  competition.  \ 

Third.  j\^ common  type  of  pool  is  one  which  endeavors  lo 
regulate  the  output,  and  thus  indirectly  to  regulate  prices.    Su( 
a  pool  rnay  laku  various  forms,   li'ower  may  be  given  to  a  centnll 
committee  to  order  a  curtailment  of  the  output  of  the  individioll 
mills,  as  in  the  cotton  bagging  pool  of  1888.*   More  commonly] 
however,  the  members  of  the  pool  through  a  process  of  discussiin)  ^ 
agree  upon  the  total  output  and  upon  the  division  of  this  outp^  \ 
among  themselves  in  certain  definite  proportions.     This  was  tl^ 
form  of  agreement  for  many  years  in  the  anthracite  coal  industiy 

*  See  Jones,  The  Anthracite  Coal  Combination  in  the  United  States,  f^, 

*  Andrews,  Quarterly  Journal  of  Economics,  3,  pp.  508-516. 
'  House  Report  no.  4165,  50th  Cong.,  2nd  Scss.,  p.  144. 



although  the  agreement  here  was  between  the  railroad  companies, 
rather  than  between  the  coal  mining  companies/ Pi diili  milinii^'  ^ 
(all  of  them  were  engaged  in  the  mining  of  coal  either  directly  or 
indirectly)  was  allotted  a  certain  percentage  of  the  total  ship- 
ments of  anthracite  coal,  and  was  expected  to  take  care  that  the 
amount  of  coal  shipped  by  it,  including  that  carried  for  indepen- 
dent coal  mining  concerns,  did  not  exceed  this  percentage. 
Sometimes  penalties  were  imposed  for  the  violation  of  these 
agreements;  at  other  times  not.  W^en  provision  was  made  for 
p>enalties,  the  railroads  exceeding  their  allotment  contributed 
to  a  fund,  which  was  distributed  among  the  railroads  that 
had  carried  less  than  their  allotment.*  ^  a..;  #*««/ 

One  of  the  most  important  pools  regulating  output  was  xne ' 
steel  rail  pool,  formed  in  August,  i88y.^  The  members  of  this 
pool  produced  more  than  90  per  cent  of  the  country's  out- 
put of  steel  rails.  By  the  agreement  adopted  the  total  out- 
put as  then  agreed  upon  was  divided  among  the  companies 
in  definite  proportions,  and  provision  was  made  for  a  Board  of 
Control,  which,  with  the  written  consent  of  75  per  cent  of  the 
tonnage,  might  increase  the  pool's  output  from  time  to  time. 
The  fixing  of  prices  was  not  provided  for  in  the  memorandum  of 
agreement,  though  an  informal  understanding  was  reached.  This 
pool  was  comparatively  successful.  The  large  capital  necessary 
for  the  manufactiu*e  of  steel  rails  discouraged  new  competition, 
and  the  practice  on  the  part  of  railway  officials  of  buying  the 
neccgsary  rails  once  a^year  acted  as  a  stabilizing  factor.  Never- 
theless, the  pool  collapsed  in  1893,  because  of  a  disagreement 
over  the  division  of  tonnage,  the  situation  being  aggravated  by 
the  prevailing  industrial  depression,  which  rendered  imperative 
a  reduction  in  the  total  output.  In  1894  the  pool  was  reorganized, 
though  not  without  considerable  difliculty.  The  depressed  state 
of  the  trade  led  to  new  violations  of  the  agreement  in  1896,  and 
in  February  of  the  following  year  the  pool  was  again  broken  up. 

*  Jones,  The  Anthracite  Coal  Combination  in  the  United  States,  pp.  41-50, 

*  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
port  I,  pp.  68-72. 


This  second  dissolution  of  the  pool  was  followed  by  a  drastic 
reduction  in  prices.  Whereas  the  pool  price  for  steel  rails  had 
'  been  $28  per  ton,  upon  the  termination  of  the  pooling  agreement 
the  price  fell  to  $16.50.^ 

Another  imix)rtant  pool  in  the  steel  industry  was  the  so-called 
wire  nail  pool,  organized  in  1895.^  The  Association  of  Wire  and 
"■^ut  Nail  Manufacturers  provided  for  a  division  of  the  output 
among  the  members  of  the  association,  and  also  fixed  the  amount 
of  nails  to  be  offered  for  sale  each  month,  and  the  price  at  which 
they  should  be  sold.  Immediately  upon  its  organization  the  pool 
advanced  the  price  of  nails.  Whereas  the  "  base  "  price  had  been 
$1.20  per  keg  in  June,  1895,  by  May,  1896,  it  had  risen  to  $2.55. 
In  view  of  the  fact  that  no  large  amount  of  capital  was  required 
to  engage  in  the  nail  business,  it  was  to  be  anticipated  that  the 
life  of  the  pool  would  be  short.  Whether  or  no  its  existence  was 
prolonged  by  its  audacious  price  policy,  it  came  to  an  end  in  De- 
ember,  1896,  about  a  year  and  a  half  after  its  organization. 

A  pool  in  the  meat-packing  industry  was  organized  as  early  as 
1885 ;  and  since  that  date  pools  of  one  kind  or  another  have  been 
maintained  almost  steadily.*  The  pool  of  1885  determined  the 
quantity  of  meat  that  each  member  might  ship,  and  by  this 
means  succeeded  in  exercising  considerable  control  over  the 
price  of  meat.  In  1893  a  more  complete  and  effective  agreement 
was  entered  into.  As  the  result  of  this  agreement  the  represen- 
tatives of  Swift  and  Company,  Armour  and  Company,  and  Mor- 
ris and  Company  held  weekly  meetings,  which  were  occasion- 
ally participated  in  by  representatives  of  the  Cudahy  Packing 
Company,  and  Hanmiond  and  Company.  At  these  meetings 
each  of  the  companies  reported  on  its  shipments  into  designated 
territories  during  the  previous  week  and  on  the  prices  received. 
These  reports  served  as  the  basis  for  the  payment  of  fines  for 

1  Brief  for  the  United  States  in  United  States  v.  United  States  Steel  Cor- 
poration (no.  481),  vol.  I,  pp.  167-168. 

'Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
part  I,  pp.  72-73;  and  Edgerton,  Political  Science  Quarteriy,  12,  pp.  246-272. 

*  Report  of  the  Federal  Trade  Commission  on  the  Meat-Packing  Industry, 
part  II,  ch.  I. 


overshipments  (40c.  per  100  lbs.),  and  for  the  allotment  for  the 
ensuing  week.  In  order  that  full  secrecy  as  to  these  arrange- 
ments might  be  maintained  and  the  consequences  of  legal  pro- 
ceedings avoided,  the  parties  to  this  agreement  were  designated 
by  certain  letters  of  the  alphabet  rather  than  by  their  real  names. 
This  poolingj^^gement  continued  from  1893  to  1896.  During 
1897  the  pajftKiS  not  effective  because  of  die  competition  of 
Schwarzschild  and  Sulzberger,  an  important  company  not  a 
member  of  the  pool.  The  following  year  a  new  pool  was  entered 
into,  including  this  time  the  firm  of  Schwarzschild  and  Sulz- 
berger. This  arrangment  lasted  until  April,  1902,  when  be- 
cause of  the  public  agitation  against  the  packers  a  decision 
was  made  to  dissolve  the  pool.  Thereuix)n  the  secretary 
lyndestroyed  all  the  records  of  the  meetings  of  the  pool. 
^^F^yTrhe  chief  difficulty  in  this  third  type  of  pool  lay  in  securing 
Lir  agreement  upon  the  percentage.allQtment,  both  at  the  organ- 
ization of  the  pool  and  upon  its  renewal  from  time  to  time.  An 
agreement  might  be  reached  at  the  time  the  pool  was  organized 
for  an  allotment  based  on  capacity,  previous  sales,  or  what  not. 
Yet  this  did  not  remove  the  difficulty;  for  each  company  was 
strongly  tempted  to  enlarge  its  plant,  in  order  that  upon  the  ex- 
piration of  the  pool  it  might  demand  an  increased  percentage  as 
a  condition  of  entry  into  a  new  pool.  If  this  demand  was  not 
acceded  to,  as  it  commonly  was  not,  it  became  impossible  to  ef- 
fect a  renewal  of  the  agreement;  and  with  the  increased  facilities 
for  production  the  market  was  flooded,  and  prices  fell,  perhaps 
even  lower  than  prior  to  the  formation  of  the  poolj  This  was 
well  illustrated  in  the  experience  of  the  steel  industry.  Upon  the 
disruption  of  the  steel  rail  pool  in  February,  1897,  the  price  of 
steel  rails  fell  to  $16.50,  which  was  about  $4  per  ton  below  the 
average  price  of  rails  during  the  six  months  preceding  the 
organization  of  the  pool. 

In  these  pools  regulating  or  apportioning  the  output  there  may 
or  may  not  have  been  an  agreement  as  to  price.  In  the  anthra- 
cite railroad  pool  of  1873,  for  example,  a  schedule  of  prices  was 
agreed  upon,  and  authority  was  given  to  a  Board  of  Control  to 
determine  the  prices  to  be  charged  from  time  to  time;  whUe  in 



the  pool  of  1885  in  this  same  industry  nothing  was  said  in  regard 
to  prices.  The  steel  rail  pool  of  1887  was  silent  on  the  subject  of 
prices;  but  the  ix)wder  pool  of  1889,  known  as  the  Fundamental 
Agreement,  gave  a  central  bcxard  full  power  to  fix  prices.  Yet 
whether  or  no  any  price-making  machinery  was  set  up,  it  was  reg- 
ulation of  prices  that  was  in  the  minds  of  those^^t  were  instru- 
mental in  organizing  output  pools.  Obviousl}^!^  could  not 
be  maintained,  much  less  advanced,  unless  the  separate  concerns 
were  prevented  from  increasing  their  output  at  will;  and  the 
regulation  of  the  output  was  thus  the  means  whereby  the 

A  desired  control  over  prices  was  to  be  exercised. 
j<^  J^ourth.  A  good  illustration  of  a  pool  providing  for  a  division 
jf  tfig  i]^]^  is  the  agreement  between  the  Addyston  I'lpe  and 
Steel  Company  and  five  other  corporations,  all  engaged  in  the 
business  of  manufacturing  cast  iron  pii>e,  and  selling  in  particular 
to  municipal  corporations,  gas  companies,  water  companies, 
and  large  institutions  accustomed  to  invite  bids  from  various 
concerns.^  Under  this  agreement,  entered  into  in  1894  and 
modified  in  1895,  tjie  companies  divided  the  United  States  into 
three  parts:  reserve  cities,  free  territory,  and  pay  territory. 
The  reserved  cities  were  reserved  for  certain  companies,  and 
none  of  the  other  companies  was  to  do  any  business  there.  Free 
territory  was  territory  in  which  any  one  of  the  comp>anies  could 
make  sales  without  restriction.  But  the  bulk  of  the  United 
States  (thirty-six  states  in  all)  was  designated  as  pay  territory; 
and  in  this  territory  (in  which  the  companies  had  a  practical 
monopoly  because  of  the  limitations  on  competition  imposed  by 
high  freight  rates)  the  conditions  of  carrying  on  business  were 
definitely  laid  down.  The  six  companies  were  to  refer  all  in- 
quiries for  pipe  in  this  section  to  a  representative  board,  and 
this  board  was  to  fix  the  price  at  which  all  pipe  in  pay  territory 
should  be  sold.  The  companies  were  then  to  bid  on  the  order, 
and  the  one  that  offered  to  pay  the  highest  bonus  obtained  the 
contract,  which  was  to  be  executed  at  the  price  already  set  by 
the  board.    In  order  that  the  existence  of  the  pool  might  not^be 

'17s  U.  S.  211-248;  and  Argument  of  Hon.  E.  B.  Whitney,  Ripley's 
Trusts,  Pools  and  Corporations  (1916),  pp.  78-96. 

POOLS  13 

suspected,  the  other  companies  were  to  make  fictitious  bids ,  bids 
sufficiently  high  to  insure  that  the  contract  would  not  be  awarded 
to  them.  At  the  end  of  each  year,  after  deducting  the  expenses 
of  the  association,  the  bonuses  were  to  be  divided  among  the 
members  of  the  pool  on  the  basis  of  their  annual  shipments  into 
pay  territorv^Bjhe  profits  of  each  company,  therefore,  consisted 
of  the  exces^Kne  price  over  the  cost  on  the  jobs  awarded  to  it, 
plus  the  bonuses  received  by  it^a  work  taken  by  the  other  com- 
panies. These  profits  were  fl^Br,  of  course,  than  they  would 
have  been  without  the  agrecS^^t,  since  the  price  to  be  charged 
for  pipe  was  fixed  by  the  representative  board,  and  therefore 
was  not  subject  to  competition  between  the  companies.  In  1899 
this  pool  was  declared  iU^al  by  the  Supreme  Court  of  the 
United  States.^ 

A  division  of  territory  was  also  established  by  the  wire  nail 
pool;  and  more  recently  by  the  meat  packers  as  regards  their  pur- 
chases of  cream  and  butter. 

In  the  tobacco  industry  an  international  pool  providing  for  a 
division  of  the  field  was  effected.  In  September,  1902,  the  Amer- 
ican Tobacco  Company  (the  American  trust)  and  the  Imperial 
Tobacco  Company  (a  British  combination)  entered  into  an 
agreement  whereby  the  trade  of  the  United  States,  Cuba,  Porto 
Rico,  Hawaii,  and  the  Philippines,  was  reserved  to  the  American 
Tobacco  Company,  and  the  trade  of  Great  Britain  to  the 
Imperial  Tobacco  Company.^  A  new  concern,  the  British- 
American  Tobacco  Company,  owned  by  the  two  companies 
above,  was  organized  to  handle  the  export  business  in  the  rest 
of  the  world.  The  earth,  like  Caesar's  Gaul,  was  divided  into 
three  parts. 

International  pools  have  also  been  established  in  the  steel 
rail,  thread,  gla^  bottle,  aluminum,  gunpowder,  calcium  car- 
bide, and  9^t  industries. 

,i^Mi^    Traols  sometimes  are  merely  selling  agencies.     The 
manufacturers  turn  over  their  total  output  to  a  centrai' selling 

« See  p.  395. 

'  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  pp.  166-176.        / 

i  >■ 


bureau,  which  makes  all  the  sal^^/^^  guuimuAliation  is  the 
Michigan  Salt  Association,  an  organization  of  salt  producers 
effected  in  1876.^    This  association  handled  85  per  cent  of  the 
salt  output  of  the  important  Michigan  field.    The  producers 
made  a  contract  with  the  association  every  year,  and  under  the 
terms  of  the  contract  they  agreed  to  deliver  to  ^Association  all 
the  salt  produced  by  them  during  the  course  o^Wyear.     Each 
member  reserved  the  right  to  D|^uce  as  much  salt  as  he  pleased, 
yet  since  the  association  had^^nlete  charge  of  sales,  it  could 
adjust  the  price  in  such  mann^^  to  prevent  overproduction. 
This  association  expired  by  limitation  in  1881,  but  was  immedi- 
ately reorganized  under  another  name.    In  1886  it  was  again 
reorganized,  this  time  under  its  original  name.   The  salt  associa- 
tion on  the  whole  was  quite  successful.    This  success  may  be 
attributed  to  the  fact  that,  like  all  selUng  agencies,  it  did  away 
with  price  cutting  by  the  members  as  a  means  of  securing  in- 
creased business. 

A  more  recent  illustration  is.  the  Continental  Wall  Paper 
Company  (1898),  a  New  York  corporation,  the  stock  of  which 
was  subscribed  to  by  a  group  of  concerns  manufacturing  98  per 
cent  of  the  coimtry's  output  of  wall  paper.^  As  the  selling  agent 
for  the  companies  in  the  pool,  the  Continental  Wall  Paper  Com- 
pany purchased  the  total  output  of  these  companies  at  prices 
fixed  in  the  agreement,  and  distributed  the  profits  among  them 
in  proportion  to  the  capacity  of  their  works.  But  the  Continen- 
tal Company  was  more  than  a  mere  selling  agency.  Its  directors 
were  constituted  a  committee  with  control  over  the  production  of 
the  individual  factories,  and  the  prices  at  which  wall  paper 
should  be  sold  to  the  trade.  The  company,  it  was  agreed,  was 
to  compel  jobbers  to  sign  an  agreement  to  buy  only  from  mem- 
bers of  the  pool  and  to  maintain  prices.  To  add  to  the  protective 
force  of  the  tariff  duties,  an  arrangement  was  made  with  the 
Canadian  wall  paper  manufacturers,  whereby  each  group 
agreed  not  to  compete  with,  the  other.  Finally,  the  only  two 
manufacturers  in  this  country  of  wall  paper  machinery  were 

*  Jenks,  Political  Science  Quarterly,  3,  pp.  83-86. 
^212  U.  S.  227-274. 

>iiuL&  rc2>urtcu  lu  lur  suppressing  irccuuiu  ui, 

:uring  undueAdces,  shown  by  the  reported 
)mplete  in  ^Bitails/^  NCVenheleSTwithin 
le  ContinentaTCompanv  found  its  power  gone. 

POOLS  15 

induced  to  confine  their  sales  of  machinery  to  members  of  the 

(Of  this  arrangement  the  Circuit  Court  said:  "A  more  complete 
monopoly  in  an  article  of  universal  use  has  probably  never  been 
brought  about.  It  may  be  that  the  wit  of  man  may  yet  devise  a 
more  complete  scheme  to  accomplish  the  stifling  of  competition; 
but  none  of  the  shifts  resorted  to  for  suppressing  freedom  of 
commerce  and  securing  undu< 
cases,  is  half  so  coi 

a  very  few  years  the  ContinentaTCompany  found  its  power  gone. 
The  increased  prices  initiated  by  the  company  led  to  the  forma- 
tion of  new  concerns,  particularly  since  a  market  was  inmiedi- 
ately  available  through  the  Continental  Company;  and  it 
proved  impossible  to  control  the  jobbers.'  The  liquidation  of 
the  company  was  therefore  determined  uix)n,  and  this  step 
occasioned  no  difliculty,  since  the  company  did  not  own  any 
operpirig  properties.  f>^  ., 

^igtfi.  A^iSh'type  of  pool  is  the  patent  pool.  /G^  rsi^tht^  ^^ 
General  Electric  Company  and  the  Westinghouse  Company — 
controlling  between  them  some  90  per  cent  of  the  manufacture 
of  electrical  supplies — entered  into  a  pooling  agreement  for  the 
joint  use  of  substantially  all  their  patents.^  This  agreement 
put  an  end  to  costly  litigation,  and  also,  it  was  reported,  to 
competition  for  the  acquisition  of  additional  patents  from 

fSame  pools  are  founded  on  the  ownership  of  patents  essential 
ta  the  manufacture  of  a  particular  article.  Thus,  certain  manu- 
facturers of  enameled  iron  ware,  owning  valuable  patents,  joined 
forces  and  agreed  to  permit  the  use  of  these  patents  by  manufac- 
turers generally  u|X)n  the  payment  of  royalty  and  upon  the  exe- 
cution of  a  license.^  The  license  agreement  established  a  sched- 
ule of  prices,  which  the  licensee  (the  manufacturer)  agreed  to 

'  148  Fed.  Rep.  947. 

*  Industrial  Commission,  XIII,  p.  284. 

*  See  Chron.,  62,  pp.  476,  502  (1896). 
'  226  U.  S.  20-52. 


observe;  and  provision  was  made  for  changes  in  prices  from  time 
to  time  by  the  licensor  with  the  approval  of  a  conmiittee  repre- 
senting the  manufacturers.  Moreover,  the  jobbers  were  brought 
into  the  deal  by  the  refusal  of  the  manufacturers  to  sell  to  those 
jobbers  who  did  not  sign  an  agreement  to  handle  only  the  goods 
of  the  licensed  manufacturers  and  to  maintain  the  resale  prices  - 
as  fixed  from  time  to  time.  The  government  claimed  that  this 
was  a  price-fixing  device  in  th^^ise  of  a  licensing  arrangement 
for  the  common  use  of  patent^p^d  was  sustained  in  this  con-  ^ 
teution  by  the  Supreme  Court. 

taleeff;  wMBHjrMrtTpoint  out  the  Q^lsoj^g^gg^nd  the  <iiaa4' 
vantages  of  pools  as  a  device  for  restraining  competition.  With 
respect  to  the  advantages,  the  pool  provided  a  means  whereby 
manufacturers  could  cooperate  in  regard  to  prices  and  trade  con- 
ditions withoul^  entirely  sacrificing  their  independence.  The 
American  business  man  was  an  individualist,  and  thus  looked 
kindly  on  a  business  arrangement  that  increased  his  profits  and 
yet  left  him  largely  the  manager  of  his  own  affairs.  The  pooling 
system  had  the  further  advantage  of  not  removing  the  financial 
inducement  to  economical  administration  of  the  indivlcTual  prop- 
perties.  Since  each  manufacturer  continued  to  oj)erate  his  own 
factory,  it  was  possible  for  him  to  increase  his  profits,  not  only 
through  better  prices,  but  als6  through  such  economies  in  pro- 
duction and  selling  ^  as»  he  might  individually  put  into  effect. 
(Howevet^  the  financial  inducement — though  it  was  not  removed 
— ^must  havit  been  impaired,  as  compared  with  true  competitive 
conditions,  inView  of  the  fact  that  a  manufacturer  who  desired  to 
increase  the  si^  of  his  plant  in  order  to  realize  the  economies  oF 
larger-scale  production  would  certainly  experience  great  difficulty 
in  Securing  assent  tg  ain  increase  in  his  percentage  allotmen%.)L 
A  third  advantage  was  that  the  pool  did  not  cause  overcapitali- 
zation nor  increased  expenses  in  the  way  of  taxes  and  fees. 
Finally,  it  provided  a  flexible  form  of  organization,  which  could 

*  Except  when,  as  in  the  central  selling  bureau,  he  no  longer  conducted 
the  sales. 

POOLS  17 

take  on  different  f<Hins  by  way  of  adjustment  to  the  varying  ' 
conditions  in  each  industry. 

Experience  ^as  shown  that  pooling  agreements  have  more 
generally  been  attended  with  success  when  there  were  present 
the  following  favoring  factors:  (i)  the  requirement  of  large  c^>- 
ital  expenditure  as  a  condition  of  economical  production-rthis 
prevented  competiti^Brom  arisbiy^o  readily;  (z)  as  a  corol- 
lary <rf  the  above, ^PlmaJ^nmnlifer'of  concerns  involved — 
this' Militated  the  establistmnt  and  maintenance  of  ti  compact 
organization;  (3)  a  willingness  to  adopt  a  farsighted  policy  with 
respect  to  output  and  prices — high  prices  might  temporarily  in- 
crease profits,  but  they  stimulated  competition,  and  thus  even- 
■  tuallyled  to  increased  output  and  lower  prices;and  (4)  a  certain 
degree  of  uniformity  among  the  members  of  the  pool  with  re- 
spect to  the  size  and  natureof  their  business — this  tended  to  give 
each  member  a  common  interest  in  the  success  of  the  pool. 
On  the  other  hand  pools  have  proven  to  be  weak  in  at  least 
two  important  particulars,     (i)  They  have  not  been  able  to 
maintain  a  sufiScient  degree  of  stability  witl^espect  either  to 
prices  or  to  industrial  policy.     The  individi^members  of  the 
nomy,  and  their  con- 
solution  of  the  agree- 
r  a  desire  oii  the  part 
t  even  if  the  pool  did 
itition,  it  proved  very 
■eriod  of  declining  de-  ' 
operative  in  order  to 
ts,  because  of  the  dis- 
output.   IIwwc  each 
le  amount  allotted  to 
tduced  prices,    Thjis,  _ 
that  as  a  contrivance 
emponuily  successful, 
jng  been  at  variance 
le  common  law  pools 
rely  nonenforceable  in 
Sherman  Act  of  1S90 



they  became  positively  illegal/  resort  was  had  in  some  indus- 
tries to  a  new  device  for  restraining  competition — the  trustee 


device.  ^  A'd&qjplim  of  this  new 
j«cttrfthe  ifext  chafttgi^--- — ^^ 

^  Railway  pools  were  made  illegal  by  the  Act  to  Regulate  Commerce  of 

*    N 



^  V. 

,    \ 



> , 

V^      I 


>\  L 





The  first  resort  to  the  trustee  device  or  the  "  trust, "  as  it  will 
be  called  to  distinguish  it  from  the  modem  trust,  was  by  the 
Standard  Oil  Company,  Prior  to  1879  Mr,  John  D.  Rockefeller 
and  his  associates  had  acquired  a  large  number  of  oil  concerns 
in  the  interest  of  the  Standard  Oil  Company,  but  the  shares 
of  these  concerns  (instead  of  being  held  directly  by  the  Stand- 
ard Oil  Company)  had  been  registered  in  many  cases  in  the 
names  of  various  individuals  who  held  them  for  the  benefit  of' 
the  company.  In  order  to  centralize  more  fully  the  control  of 
these  properties,  it  was  decided  in  1879  to  organize  the  Standard 
Oil  "trust," 

The  "  trust"  agreement  as  revised  in  January,  1882,  included 
about  forty  companies,  controlling  from  r^  fn  gi;  ptr  rent  nf  the 
refining  capacity  of  the  country.*  It  provided  for  gir^e  trpatees, 
rs.  John  I).  Rockefeller,  William  Rocke- 
I  John  Archbold.  The  trustees  received 
to  the  agreem'ent  an  assignmgnt  oLtheir 
,  and  in  return  therefor  gave  "  tfust  cer- 
the  valuation  of  the  properties.  The 
the  owners  of  the  stocks  deposited  with 
hem  in  trust  for  the  owners  of  the  trust 
;  noted,  however,  that  these  stocks  were 
he  joint  account  rather  than  for  the  in- 
:ertificate  holders;  a  stockholder  in  any 
e  trust  agreement  his  title  to  the  stock 
ny,  and  secured  instead  a  proportionate 

[cs  in  Standard  Oil  Company  v.  United  States 
ropy  ()f  the  aRrccment  is  in  the  Report  of  the 
iR  on  the  Petroleum  Industry,  part  I,  pp.  361- 



interest  in  all  the  stocks  and  property  held  by  the  trustees.' 
The  trustees  together  owned  466,280  of  the  trust  certificates 
out  of  a  total  of  700,000;  and  four  of  them  held  a  majority  of 
the  trust  certificates.  They  were  thus  able  to  elect  the  officers 
and  directors  of  each  of  the  constituent  companies,  and  to  man- 
age the  properties  in  complete  harmony. 

The  trustees  under  this  agreement  were  given  powers  sub- 
stantially similar  to  those  possessed  by  the  directors  of  an  ordi- 
nary holding  company.  They  were  to  collect  the  interest  and 
dividends  on  the  securities  held  in  trust,  and  to  redistribute 
such  portion  thereof  as  they  saw  fit  among  the  holders  of  the 
trust  certificates.  They  were  authorized  to  use  any  surplus 
trust  funds  to  purchase  the  bonds  and  stocks  of  other  companies 
engaged  in  the  oil  business,  and  to  hold  these  securities  for  the 
benefit  of  the  trust  certificates.  The  centralized  control 
provided  for  in  the  agreement  made  it  possible  for  the  trustees 
to  dismantle  those  refineries  that  were  poorly  located,  and  to 
build  new  works  at  strategic  points.  Obviously  it  made  no  dif- 
ference to  the  former  owners  of  a  given  plant  whether  or  not  that 
plant  was  operated,  since  they  received  a  certain  percentage  of 
the  profits  earned  by  all  the  companies.  The  trust  agreement, 
further,  made  provision  for  the  admission  of  new  companies  and 
individuals;  for  the  formation,  whenever  advisable,  of  a  Stand- 
ard Oil  Company  in  any  state  in  the  country.  The  juration  of 
the  op^^^^^^l  ^e  ir.  K^  f^|.  «^  p^yiod  of  twffl^yO"*'  y^V^  flf^^^ 
the  death  of  the  last  survivingtrustee.  but  provision  was  made 
for  the  termmation  of  the  agreement  within  one  year  of  its  exe- 
cution upon  the  approval  of  nine-tenths  of  the  certificates  (in 
value),  and  within  ten  years  upon  the  approval  of  two-thirds  of 
the  certificates. 

The  success  of  the  Standard  Oil  "trust"  invited  imitation. 
In  1884  there  was  formed  the  American  Cotton  Oil "  trust ";  and 
in  1885  the  National  Linseed  Oil  '*  trust.  "^    The  cotton  oil 

*This  consideration  proved  to  be  highly  important  when  the  "trust" 
was  dissolved  in  1892.    See  p.  25. 

'  Conant,  Publications  of  the  American  Statistical  Association,  7,  p.  208 
(March,  1901). 


"trust"  included  some  seventy  mills,  located  for  the  most  part 
in  the  South,  engaged  in  manufacturing  and  refining  cotton  seed 
oil.^  Its  form  of  organization  was  precisely  like  that  of  the 
Standard.  However,  it  soon  met  with  difficulties  on  all  sides,  and 
in  1889  was  reorganized  as  the  American  Cotton  Oil  Company. 
In  1887  a  "  trust "  was  organized  in  the  whisky  business.  From 
1882  to  1887  some  eighty  distillers  had  maintained  a  precarious 
existence  through  pools.  These  pools,  however,  had  proven 
unsatisfactory;  it  had  not  been  possible  to  maintain  them.  Ac- 
cordingly the  leading  distillers  decided  to  establish  a  more  com- 
pact organization  modelled  on  the  Standard  Oil  trust  agreement 
of  1882.  This  was  accomplished  in  May,  1887.^  The  Distillers 
and  Cattle  Feeders'  Trust,  as  the  new  organization  was  called, 


comprised  about  eighty  companies,  located  mainly  in  New  York, 
Ohio,  Indiana,  Illinois,  Wisconsin,  Missouri,  and  Nebraska, 
manufacturing  from  85  to  90  per  cent  of  the  total  output  of  al- 
cohol and  spirits.  There  were  nine  trustees,  who  issued  trust 
certificates  in  exchange  for  the  shares  of  the  corporations  enter- 
ing the  "trust."  Inasmuch  as  the  trustees  held  a  majority  of 
the  stock  of  every  corporation,  they  were  able  to  elect  the 
directors  and  officers,  and  thus  to  control  the  management. 
This  in  turn  enabled  them  to  control  the  market,  for  instead  of 
exporting  the  surplus  at  a  loss,  as  had  been  done  by  the  earlier 
pook,  it  was  now  possible  to  limit  the  output  to  the  demand. 
It  also  lay  within  the  power  of  the  trustees  to  close  up  the  poor- 
est distilleries;  and  they  did  close  some  sixty-eight  of  them, 
the  output  being  concentrated  in  the  best  equipped  plants, 
with  a  consequent  saving  in  the  cost  of  production. 

Another  group  resorting  to  the  trustee  device  was  the  sugar 
refiners.  During  the  seventies  and  eighties  competition  in  the 
sugar  refining  industry  had  been  quite  keen;  between  1867  and 
1887  some  thirty-six  refineries  had  been  closed.'    By  1887  there 

*  Andrews,  Quarterly  Journal  of  Economics,  3,  p.  1 29. 

'  A  copy  of  the  agreement  is  in  House  Report  no.  4165,  50th  Cong.,  2nd 
Seas.,  pp.  57  seq.  Sec  ibid.,  pp.  64,  72,  91;  and  Jenks,  Political  Science 
Quarterly,  4,  pp.  305-308. 

•  Cf.  Jones,  Quarterly  Journal  of  Economics,  34,  p.  505. 



were  left  only  twenty-six  refineries,  operated  by  twenty-three 
companies.  The  concerns  that  survived  this  period  of  severe 
competition  were  those  that  resorted  to  large-scale  production, 
with  its  resulting  economies.  In  August,  1887,  seventeen  of 
these  companies,  owning  twenty  refineries,  and  possessing 
among  them  approximately  78  per  cent  of  the  refining  capacity, 
entered  into  a  trust  agreement  to  become  effective  October  i, 

In  its  main  provisions  this  agreement  was  substantially  like 
the  trust  agreements  already  described.  Eleven  trustees  con- 
stituted a  Board,  known  as  the  Sugar  Refineries  Company,  and 
distributed  trust  certificates  ($50,000,000)  to  the  shareholders 
of  the  corporations  in  return  for  the  securities  held  by  them. 
The  trustees  thereupon  caused  themselves  or  their  representa- 
tives to  be  elected  directors  of  the  separate  corporations,  and 
were  thus  able  to  manage  the  affairs  of  all  in  unison.  It  was 
provided  that  15  per  cent  of  the  certificates  allotted  to  the  sev- 
eral companies  should  be  left  with  the  Board,  and  that  these 
and  any  part  of  the  $50,000,000  of  certificates  not  allotted  might 
be  employed  by  the  Board  for  the  acquisition  of  other  refineries 
or  for  certain  other  purposes.  A  unique  feature  of  the  sugar 
trust  deed  was  a  provision  that  no  trustee  should  be  interested 
directly  or  indirectly  in  the  purchase  or  sale  of  sugar,  whether 
for  the  purpose  of  speculation  or  otherwise,  without  the  consent 
of  a  majority  of  the  Board.  Of  the  twenty  refineries  acquired 
by  the  Sugar  Refineries  Company  twelve  were  soon  dismantled, 
and  the  other  eight  were  consolidated  into  four. 

In  this  same  year  (1887)  there  was  organized  the  National 
Lead  Trust  ^  and  the  Cordage  '*  trust. "  ^  The  latter,  known  as 
the  National  Cordage  Association,  controlled  at  this  time  only 
30  per  cent  of  the  country's  output  of  rope  and  cordage;  it  was 

^  Original  Petition  in  United  States  v.  American  Sugar  Refining  Company, 
pp.  38-40, 166.    For  a  copy  of  the  trust  agreement,  see  ibid.,  exh.  A. 

'  Conant,  Publications  of  the  American  Statistical  Association,  7,  p.  209 
(March,  1901). 

•Dewing,   Corporate   Promotions  and  Reorganizations,   pp.    116-117, 



not  until  1891  that  it  attained  a  monopolistic  position  in  the 

The  organization  of  these  "trusts"  was  followed  by  a  general   a 
outcry  against  monopolies.    How  fully  the  attention  of  the  pub-    ' 
lie  had  been  called  to  the  establishment  of  the  "trusts,"  and 
what  its  reaction  was,  is  shown  by  the  numerous  laws  forbidding 
combinations  and  trusts  enacted  by  the  state  legislatures  from 

1889  to  1893,^  and  by  the  passage  by  the  National  Congress  in 

1890  of  the  Sherman  Anti-trust  Act,  which  prohibited  every 
contract,  combination  in  the  form  of  trust  or  otherwise,  or  con- 
spiracy, in  restraint  of  trade  or  commerce  among  the  several 
states,  or  #ith  foreign  nations,  and  every  monopoly  or  attempt 
to  monopolize.  And  as  it  soon  proved,  the  "trusts"  were  par- 
ticularly vulnerable,  much  more  so  than  the  pools.  The  pools, 
it  is  true,  were  unlawful,  but  they  were  secret  agreements,  and 
therefore  were  to  some  extent  free  from  attack.  The  Addyston 
Pipe  and  Steel  Company  is  the  most  conspicuous  instance  of  a 
pool  dissolved  by  legal  process,  and  the  evidence  here  was  ob- 
tained only  because  a  disgruntled  stenographer  painstakingly 
accumulated  it.  The  trust  agreements  of  the  eighties,  however, 
were  tangible  matters  of  record.  There  was  a  formal  transfer 
by  the  stockholders  of  their  legal  title  to  the  stock  of  the  con- 
stituent companies,  as  a  consideration  for  which  they  received 
trust  certificates.  The  rights  of  the  members  were  clearly  de- 
fined in  the  trust  agreement.  The  fact  could  not  be  concealed 
that  these  companies,  whose  corporate  existence  had  been  pre- 
served, had  almost    completely  sacrificed  their  independence. 

Hardly  had  the  "trusts"  been  created  when  legal  proceedings 

were  instituted  against  them.    The  state  of  Louisiana  attacked 

the  cotton  oil  "trust";   the  state  of  Nebraska,  the   whisky 

"trust";  *  the  state  of  New  York,  the  sugar  "trust"; and  the 

*  At  kast  six  states — Kansas,  Maine,  Michigan,  North  Carolina,  Tennes- 
see, and  Texas — passed  such  laws  in  i88g. 

*Sec  p.  312  for  the  decision  of  the  Supreme  Court  of  Nebraska;  and 
p.  316  for  the  decision  of  the  Supreme  Court  of  Illinois  declaring  illegal 
both  the  whisky  "trust"  of  1887  and  the  corporation  that  succeeded  in  1890 
to  its  business. 



State  of  Ohio,  the  oil  "trust."  The  action  against  the  sugar 
"trust"  came  in  1888.  In  that  year  the  Attorney  General  of 
New  York  State  brought  suit  under  the  common  law  against 
the  North  River  Sugar  Refining  Company,  a  New  York  corpor- 
ation, pra3dng  that  the  charter  of  the  company  be  vacated  and 
the  company  dissolved.  In  a  decision  rendered  in  June,  1890, 
the  Circuit  Court  of  Appeals  decided  against  the  company.^ 
The  court  held  that  the  North  Rjyc^Sugar  Refining^ompany, 
in  entering  the  "trust,"  had  given  over  the  control  of  its 
affairs  to  an  irresponsible  board,  and  that  such  delegation  of 
its  essential  corporate  powers  was  a  perversion  of  the  privi- 
leges conferred  by  the  company's  charter.  Furthermore,  the 
court  held  that  the  company  had  helped  to  create  a  trust 
which,  in  substance  and  effect,  was  a  partnership  of  separate 
corporations,  and  for  corporations  to  enter  a  partnership  was 
illegal.  The  company's  charter,  therefore,  was  taken  away,  and 
its  corporate  existence  terminated. 

The  Standard  Oil  "  trust"  agreement  was  likewise  condemned 
by  the  courts.  In  May,  1890,  the  Attorney  General  of  Ohio 
filed  a  petition  against  the  Standard  Oil  Company  of  Ohio, 
charging  that  the  company  had  violated  the  laws  of  the  state  by 
placing  the  control  of  its  affairs  in  the  hands  of  trustees,  nearly 
all  of  whom  were  nonresidents  of  the  state.  Great  pressure 
was  brought  to  bear  on  the  Attorney  General  to  induce  him  to 
discontinue  the  suit,  but  without  success.  The  decision  of  the 
Supreme  Court  was  rendered  in  March,  1892.^  As  in  New  Yoric 
State,  the  "trust"  arrangement  was  declared  illegal,  though  the 
Ohio  court  put  more  emphasis  on  the  creation  of  a  monopoly. 
The  court  said:  "  the  observance  [of  this  agreement]  must  subject 
the  defendant  [the  Standard  Oil  Company  of  Ohio]  to  a  control 
inconsistent  with  its  character  as  a  corporation.  .  .  .  The  law 
requires  that  a  corporation  should  be  controlled  and  managed  by 
its  directors  in  the  interests  of  its  own  stockholders,  and  confor- 

*  121  N.  Y.  Reports  582-626.  The  decision  is  described  in  more  detail 
on  p.  313. 

'49  Ohio  State  Reports  137-189.  For  a  fuller  discussion  of  this  decision, 
see  p.  314. 


mable  to  the  purpose  for  which  it  was  created  by  the  laws  ef  its 
state.  By  this  agreement,  indirectly,  it  is  true,  but  none  the  less 
effectually,  the  defendant  is  controlled  and  managed  by  the 
Standard  CHI  Trust,  an  association  with  its  principal  place  of 
business  in  New  York  City,  and  organized  for  a  purj)ose  contrary 
to  the  policy  of  our  laws.  Its  object  was  to  establish  a  virtual 
monopoly  of  the  business  of  producing  petroleum,  and  of  man- 
ufacturing, refining  and  dealing  in  it  and  all  its  products, 
throughout  the  entire  country,  and  by  which  it  might  not  merely 
control  the  production,  but  the  price  at  its  pleasure.  All  such 
associations  are  contrary  to  the  policy  of  our  state  and  void." 
The  court  did  not  order  the  dissolution  of  the  Standard  Oil 
Company,  as  urged  in  the  petition,  but  simply  commanded  it  to 
cease  its  connection  with  the  "  trust." 

Any  expectation  that  the  decision  of  the  Supreme  Court  of 
Ohio  would  put  an  end  to  the  oil  monopoly  proved  to  be 
unfounded  when  the  nature  of  the  dissolution  became  i^parent. 
On  March  21,  1892,  at  a  meeting  of  the  trust  certificate 
hold^s,^  a  r^olutjon^ terminating  the  "trust"  was  adopted.* 

At  tfiU  timP  thp  stnrlrg  nf  piprhfv-fniir  rompanii^  were  held  by 

the  Standard  Oil  trustees.  On  April  i  the  stocks  of  sixty-four  of 
these  corporations  were  transferred  to  some  one  of  the  remain- 
ing twenty.  This  left  the  stocks  of  twenty  companies  in  the 
hands  of  the  trustees,  and  these  they  proceeded  to  distribute 
among  the  holders  of  the  trust  certificates.  There  were  out- 
standing at  this  time  $97,250,000  trust  certificates.  The  trus- 
tees, who  became  liquidating  trustees,  divided  the  stock  of 
each  of  the  twenty  companies  into  972,500  ^rts.  They  then 
cAered  to  give  to  each  trust  certificate  hdlcler  in  exchange  for 
each  share  1/972,500  part  of  the  stock  of  each  one  of  the  twenty 
corporations.  The  only  ones  who  accepted  this  offer  were  the 
trustees  (themselves  the  largest  certificate  holders)  and  the 
members  of  their  families  and  their  immediate  associates.  The 
smaller  trust  certificate  holders  were  discouraged  from  liquidat- 
ing by  the  fact  that  they  would  have  received  only  fractional 

*  On  the  dissolution  scheme  see  Brief  for  the  United  States  in  Standard  Oil 
Company  ».  United  States  (no.  725),  vol.  I,  pp.  56-58,  60-61,  70,  72. 



shares  in  the  twenty  companies,  and  these  companies  declined  to 
pay  dividends  on  fractional  shares.  Dividends  continued  to  be 
paid,  however,  on  the  trust  certificates  when  not  liquidated.  The 
nine  trustees,  therefore,  became  the  holders  of  the  majority  of 
the  stocks  of  the  twenty  companies,  and  as  liquidating  trustees 
they  also  held  the  stocks  not  exchanged  for  trust  certificates. 
This  dissolution  obviously  was  nominal;  it  effected  no  real 
change  in  the  situation.  In  fact,  Mr.  Archbold  admitted  before 
the  Industrial  Commission  that  the  companies  worked  together 
after  the  dissolution  as  harmoniously  as  before.^ 

It  was  apparent  that  the  Standard  interests  had  not  attempted 
to  obey  the  court's  order,  but  had  stooped  to  a  mere  subter- 
fuge. A  new  suit,  therefore,  was  instituted  in  1897  against  the 
Standard  Oil  Company  for  failure  to  obey  the  court's  decree  of 
March,  1892.  This  suit  dragged  along  until  December,  1900, 
when  it  was  dismissed.  Meanwhile  the  Standard  Oil  Company 
had  reorganized  as  a  holding  company.^ 

1 1,  p.  574.  *  See  p.  56. 



The  decisions  of  the  New  York  and  Ohio  courts  m  1890  and 
189a,  respectively,  showed  that  even  without  the  prohibitions 
of  the  Sherman  Anti-trust  Act  the  "trust,"  sofar  as  thelaw  was' 
concerned,  was  not  a  permissible  form  of  business  organization. 
The  Standard  Oil  interests,  it  is  true,  avoided  collision  with  the 
law  for  a  time  by  the  development  of  a,eMnnuivty  of  interest, 
but  this  loose  fonn  of  organization  proved  satisfactory  mainly  J 
because  there  already  existed  among  the  members  an  unusual  ( 
d^ree  of  mutual  confidence  and  good  will.  It  appeared,  there- ' 
fore,  that  unless  some  new  expedient  for  resttaining  competition 
could  be  hit  upon,  the  manufacturers  msistent  upon^JiQlding 
ctmipetition  in  check  must  needs  resort  once  more~foTJooi- 
ing  agreements.  Yet  this  was  even  less  desirable  than  before 
from  the  manufacturers'  standpoint,  since  the  Sherman  Anti- 
trust law  had  been  passed  in  1890.  This  act  made  poob,  when 
effecting  a  restraint  of  trade,  not  only  unenforceable,  as  under 
the  common  law,  but  actually  ill^jal;  and  theii  existence  would 
therefore  have  to  be  kept  secret.  By  what  means  then  were  the 
manufacturers  to  secure  relief? 

The  new  expedient  to  restrain  competition  was  the  modem 

trust.    The  trust  was  effected  in  one  of  two  ways:  either  by 

means  ofTsecurity  holding  corporation,  that  is,  a  company  own- 

)ther  companies;  or  by  means 

,  that  is,  a  company  owiung 

perty  of  the  companies  to  be 

is  a  type  of  business  organ- 
up  of  corporations  by  owning 
le  holding  company,  whether 
le  already  in  existence,  must 


'    possess  legislative  authority  to  hold  the  stocks  of  other  corpora- 

.  tions.  Armed  with  such  authority  it  proceeds  to  purchase, 
either  with  cash  or  with  its  own  securities,  a  majority  at  least 
of  the  shares  of  the  companies  which  it  plans  to  combine.  The 
controlled  companies  maintain  their  separate  existence,  they 
have  their  separate  officers  and  managers,  and  they  are  nom- 
inally independent;  yet  inasmuch  as  the  holding  company  elects 
their  directors,  it  can  eflFectively  control  their  management 
and  operate  their  properties  in  accordance  with  a  unified 

V  The  holding  corporation  was  thus  after  all  but  a  modification 
of  the  illegal  "trust"  which  it  was  designed  to  supersede.    As 

,  Professor  Meade  has  pointed  out,'  the  only  important  changes 
effected  were:  the  substitution  of  the  shares  of  the  holding  com- 
pany for  the  certificates  of  the  old  "trust";  the  substitution  of 
the  relation  of  owner  for  the  relation  of  trustee;  and  the  sub- 
stitution of  a  board  of  directors  for  a  board  of  trustees.  It  would 
appear  therefore  that  from  the  point  of  view  of  legal  principle 
the  new  arrangement  was  quite  as  unlawful  as  the  old. 

What  then,  it  may  be  asked,  was  to  be  gained  by  adopting 
the  new  form  of  organization?  The  possible  gain  was  two-fold. 
From  a  legal  point  of  view  the  holding  company  might  prove 

'  less  vulnerable.  The  old  "trust"  was  an  agreement  between  a 
body  of  trustees  and  a  group  of  corporations,  which,  through  the 
action  of  a  majority  of  their  stockholders,  surrendered  their  in- 
dependence,  and  in  so  doing  exceeded  their  corporate  powers. 
The  holding  company,  however,  was  authorized  by  law  to  hold 
the  securities  of  other  companies.  As  a  device  for  restraining 
competition  it  had  not  yet  been  declared  illegal,  and  tjiere  was 
at  least  the  possibility  that  it  might  successfully  withstand  an 
attack  upon  its  validity.  Yet  even  if  ultimately  its  fate  did 
prove  to  be  that  of  the  "  trust,"  a  second  gain  was  possible.  .  The 
organization  of  the  holding  company  insured  a  temporary  res- 
pite from  competition,  and  presumably  the  profits  thus  realized 
would  be  retained  by  the  corporation  or  its  stockholders,  and 
would  not  need  to  be  returned  to  the  consumers  from  whom 

*  Trust  Finance,  p.  36. 


tbey  had  come.  Barring  heavy  penalties  for  the  employment  of 
an  ill^al  device,  there  was  much  to  gain  in  the  o^anization  of 
a  holding  company  trust  and  little  to  lose. 

If  the  holding  company  as  a  means  of  eliminating  competition 
presented  such  attractive  possibilities,  why  was  it  not  adopted 
earlier?  The  reason  is  that  no  express  legislative  sanction  ex- 
isted for  the  creation  of  a  holding  company.'  The  power  to  buy 
and  sell  the  stocks  of  other  corporations,  like  all  other  corporate 
powers,  is  one  derived  from  legislative  authority;  and  during  the 
period  when  "trusts"  were  being  formed  (1879-1887)  no  state 
had  passed  a  general  law  specifically  granting  this  privilege. 
Such  few  holding  companies  as  existed  had  been  created  under 
special  laws.  One  of  the  first  holding  companies  of  any  con- 
sequence to  be  authorized  was  the  Pennsylvania  Company, 
chartered  in  the  interest  of  the  Pennsylvania  Railroad  Com- 
pany in  1870,  and  empowered  "to  make  purchases  and  sales 
for  investments  in  the  bonds  and  securities  of  other  companies. " 
The  reason  for  this  special  enactment  was  to  permit  the  Penn- 
sylvania Railroad  to  centralize  the  control  of  certain  lines  that 
were  closely  affiliated  with  it.^ 

An  arrangement  of  somewhat  the  same  sort  was  made  use  of 

by  the  Philadelphia  and  Reading  Railway  in  the  early  seventies. 

This  railway  was  anxious  to  possess  anthracite  coal  properties 

in  order  to  insure  an  ample  coal  traffic  for  the  future.    Under  its 

charter,  however,  it  had  no  authority  to  own  coal  lands.    It 

ted  in  its  interest  the  Laurel  Run  Im- 

hich  was  authorized  by  its  charter  to 

ine  coal.    The  charter  further  provided 

ling  company  might  be  acquired  by  any 

>r  mining  company.     Thereupon  the 

g  Railway  proceeded  to  buy  all  the  coal 

LIS  indirectly  it  secured  the  power  to  act 

this  particular  instance.^ 

ceptional  cases  as  these,  the  holding  by 

Relalbns  (second  edition),  sees,  5,  164  fT. 

;  Pennsylvania  Railroad,  1871,  p.  i<). 

«!  Combination  in  the  United  States,  p.  30. 



one  corporation  of  stock  in  another  corporation  was  not  legal, — 
or  at  least  had  not  been  so  held  by  the  courts.  And  in  view  of 
the  popular  hostility  towards  trusts,  which  resulted  in  a  wave  of 
anti-trust  legislation  after  1889,  it  was  hardly  to  be  expected 
that  any  state  would  go  out  of  its  way  to  extend  assistance  to 
those  who  were  searching  for  a  new  device  to  legalize  their  opera- 
tions. The  unexpected,  however,  came  to  pass.  It  was  the  state 
of  New  Jersey  that  came  to  the  rescue. 

Whether  or  not  the  legislators  realized  the  full  significance 
of  their  action,^  the  state  of  New  Jersey  amended  its  corporation 
law  in  May,  1889,  and  provided  that  the  directors  of  any  com- 
pany organized  under  the  act  of  1875  might  purchase  "  the  stock 
of  any  company  or  companies  owning,  mining,  manufacturing 
or  producing  materials,  or  other  prof)erty  necessary  for  their 
business,"  and  issue  its  own  stock  in  payment  therefor.^  Four 
years  later,  in  1893,  the  doors  were  thrown  completely  open  to 
the  creation  of  holding  companies  by  the  enactment  of  a  pro- 
vision that  any  corporation  might  purchase  and  hold  the  se- 
curities of  any  other  corporation  no  matter  in  what  state  incor- 
porated, and  might,  while  the  owner,  exercise  all  the  rights  of 
ownership.'  No  o()erating  duties  were  required  of  the  holding 
company;  its  duties  were  simply  the  ownership  of  stock,  the 
election  of  officers  and  directors,  the  receipt  of  dividends  from 
the  constituent  companies,  and  the  payment  of  these  dividends 
in  whole  or  in  part  to  its  own  stockholders. 

^  The  charge  has  been  made  that  some  of  the  trusts  "are  a  product  of 
legislation  obtained  by  their  own  lawyers  and  legislative  agents,  put  quietly 
through  under  the  cover  of  the  anti-trust  agitation,  while  the  public,  led  by 
the  newspapers,  were  looking  somewhere  else."  Whitney,  former  Assistant 
Attorney  General  of  the  United  States,  Publications  of  American  Economic 
Association,  3rd  series,  vol.  6,  part  II,  p.  4  (Papers  and  Proceedings). 

*  Dill,  The  Statute  and  Case  Law  of  the  State  of  New  Jersey  relating  to 
Business  Companies  (1910),  p.  80. 

*Dill,  op.  dt.,  p.  80.  The  section  in  full  read:  "Any  corporation  may 
purchase,  hold,  sell,  assign,  transfer,  mortgage,  pledge  or  otherwise  dispose  of 
the  shares  of  the  capital  stock  of,  or  any  bonds,  securities,  or  evidences  of 
indebtedness  created  by  any  other  corporation  or  corporations  of  this  or  any 
other  state,  and  while  owner  of  such  stock  may  exercise  all  the  rights,  powers 
and  privileges  of  ownership,  including  the  right  to  vote  thereon." 


The  example  set  by  New  Jersey  was  soon  followed  by  other 
states  determined  to  prevent  New  Jersey  from  securing  a 
monopoly  of  incorporation  fees  and  other  fees  and  taxes.  Among 
the  numerous  states  that  revised  their  general  corporation  laws 
to  permit  the  creation  of  holding  companies  were  Delaware, 
Maine,  West  Virginia,  and  New  York,  these  states  being  con- 
spicuous for  the  "  liberal "  character  of  their  legislation.^ 

One  of  the  first  companies  to  avail  itself  of  the  New  Jersey 
legislation  was  the  American  Cotton  Oil  "Trust."  Fearing 
lest  the  "trust"  should  prove  illegal,  it  reorganized  in  New 
Jersey  in  October,  1889,  as  the  American  Cotton  Oil  Company, 
a  holding  company  possessing  the  stocks  of  sixteen  constituent 
concerns.*  The  American  Cotton  Oil  Company  also  operated  a 
large  refinery  in  New  Jersey  on  its  own  account,  but  it  was 
primarily  a  holding  company. 

In  spite  of  the  advantages  of  the  holding  company  plan, 
however,  few  concerns  availed  themselves  at  once  of  the 
opportunity  thereby  afforded  of  organizing  a  trust.  Thus,  the 
Standard  Oil "  trust,"  though  declared  illegal  in  1892  and  obliged 
to  reorganize,  did  not  seek  refuge  in  New  Jersey,  but  relied 
instead  on  the  community  of  interest  plan.  That  more  New 
Jersey  holding  companies  were  not  formed  is  partly  explained  by 
the  unsatisfactory  state  of  business  during  the  early  life  of  the 
law,  the  period  from  1893  to  1897  being  one  of  severe  industrial 
depression,  when  the  flotation  of  new  issues  of  securities  would 
have  proved  diflScult;  and  partly  by  the  fact  that  use  was  made 
of  the  other  method  of  forming  a  modem  trust,  namely,  the 
property  owning  corporation. 

Second.  Most  of  the  trusts  or  attempted  trusts  organized  in 
the  years  immediately  following  the  court  decisions  declaring 
the  "trusts"  or  "trust"  agreements  illegal,  took  the  form,  not  of 
a  security  holding  company,  but  a  property  holding  company. 
This  second  type  of  trust  came  into  being  in  at  least  three 

>  The  statutes  of  the  different  states  authorizing  corporations  to  acquire 
stock  in  other  corporations  are  given  in  Noyes  on  Intercorporate  Relations 
(second  edition),  sec.  271. 

*  Industrial  Commission,  XIII,  p.  680. 

I    i 



different  ways:  (i)  by  means  of  a  consolidation  or  merger;  (2) 
by  means  of  purchase  and  sale;  and  (3)  by  means  of  exchange  of 
property  for  stock.^ 

(i)  Consolidation  or  merger  may  be  defined  as  the  union  in 
one  corporate  body  of  two  or  more  existing  corporations.^  In 
effecting  a  consolidation  the  property  and  business  of  one  or  more 
companies  is  turned  over  to  the  consolidated  company,  whether 
or  no  this  be  a  newly  created  corporation  or  one  already  existing.* 
By  the  act  of  consolidation  the  separate  companies  completely 
lose  their  identity,  unless  indeed  their  existence  is  maintained 
for  some  special  purpose,  such  as  the  adjustment  of  claims.*  The 

'  In  common  usage  the  terms  "  purchase  "  and  "  sale  "  are  applied  to  the 
acquisition  by  one  corporation  of  the  property  of  others  in  exchange  for  its 
stock  (see  Noyes  on  Intercorporate  Relations,  second  edition,,  sec.  319); 
and  it  may  be,  therefore,  that  our  classification  of  prop>erty  owning  trusts  is 
more  minute  than  is  necessary. 

'  Some  legal  authorities  make  a  distinction  between  a  consolidation 
and  a  merger.  Thus,  Thompson,  Law  of  Private  Corporations  (second 
edition)  says,  "there  seems  to  be  a  recognized  di£ference  between  'consolida- 
tion' and  *  merger'"  (sec.  6035).  "Consolidation  takes  place  where  two  or 
more  existing  corporations  are  consolidated  into  a  single  corporation,  and  the 
existence  of  the  uniting  corporations  is  terminated  and  the  consolidated 
company  succeeds  in  a  general  way  to  the  rights  and  franchises  and  acquires 
the  property  and  assumes  the  obligations  and  liabilities  of  all  the  constituent 
companies"  (sec.  6035).  A  merger,  on  the  other  hand,  "exists  where  one  of 
the  constituent  companies  remains  in  being,  absorbing  or  merging  in  itself 
all  the  other  companies"  (sec.  6037).  But  in  Judicial  and  Statutory  Defi- 
nitions of  Words  and  Phrases,  1914,  p.  908,  we  are  told  that  the  terms  con- 
solidation and  merger  are  not  always  used  with  strict  accuracy.  As  one 
authority  puts  it  (ibid.,  1904,  p.  1452),  the  term  consolidation  is  an  elastic 
one,  and  may  include  a  union  of  two  or  more  corporations  into  a  new  one 
with  a  different  name,  with  or  without  extinguishing  the  constituent  cor- 
porations, or  the  merging  of  two  or  more  corporations  into  one  existing 
corporation  under  the  name  of  the  latter.  See  also  Noyes  on  Intercorporate 
Relations  (second  edition),  sees.  7-8.  For  our  purposes  there  is  nothing 
in  particular  to  be  gained  by  determining  whether  the  property  of  the 
companies  combined  has  been  turned  over  to  a  new  corporation  or  has  been 
acquired  by  an  already  existing  corporation;  and  we  shall  therefore  use  the 
words  consolidation  and  meiger  interchangeably. 

*  See  footnote  above. 

♦Thompson  on  Corporations  (second  edition),  sec.  6041. 


consolidation  thus  represents  the  complete  fusion  of  two  separate 

A  consolidation  is  ultra  vires  unless  authorized  by  legislative 
authority;  and  the  legislature  may  withhold  its  consent  entirely, 
or  it  may  permit  consolidation  upon  such  conditions  as  it  chooses  I 
to  impose.^    Legislative  approval  of  consolidation  may  be  given  i 
in  various  ways.^    The  legislature  may  provide  for  consolidation 
under  a  general  corporation  law;  and  most  states  through  such  , 
laws  now  permit  the  formation  of  consoUdations  for  lawful 
purposes.     It  may  grant  the  constituent  companies  charters  ; 
p>ermitting  consolidation  under  certain  conditions.    It  may  even 
give  its  approval  after  the  fact  by  the  recognition  of  the  consoli- 
dated corporation;  and  such  legislative  recognition  is  equivalent 
to  legislative  ratification.     When  the  corporations  to  be  con- 
solidated are  creatures  of  different  states  the  approval  of  each 
separate  state,  by  general  law  or  ./Otherwise,  is  necessary  to  ■ 
make  the  consolidation^  valid.'  \ 

Yet  even  if  the  legislature  has  giyen  its  assent,  no  corporation 
can  consolidate  with  another  without  the  consent  of  the  stock- 
holders. If  the  charter  of  a  company  gives  it  authority  to 
consolidate,  or  if  any  general  law  in  force  at  the  time  when  the 
company  was  chartered  permits  consolidation,  only  the  consent  of 
a  majority  of  the  shareholders  is  required;  otherwise  the  consent 
of  all  the  shareholders  is  necessary.^  A  dissenting  stockholder 
in  the  latter  case  can  not  be  compelled  to  give  his  assent,  and  his 
consent  can  not  be  implied. 

When  the  consent  of  the  legislature  and  of  the  stockholders' 
has  been  secured,  the  process  of  effecting  a  consolidation, 
as  already  pointed  out,  is  for  the  separate  companies  to 
transfer  their  property  and  assets  to  the  consolidated  com- 
pany, whereupon  they  become  extinguished.^  The  consoli- 
dated company  is  thus  an  operating  unit,  in  contrast  with  the 

*  Thompson  on  Corporations  (second  edition),  sees.  6oif3,  6045. 

*  Noyes  on  Intercorporate  Relations  (second  edition),  sec.  20. 
'  Ibid.,  sec.  100. 

*  Morawetz  on  Private  Corporations,  sec.  951. 

*  Unless  one  of  them  becomes  the  consolidated  company. 


holding  company,  which  ordinarily  is  not  an  operating  unit 
at  all.^ 

(2)  Purchase  and  sale.  "  It  is  an  elementary  principle  of  cor- 
poration law  that  a  corporation,  subject  to  the  limitations  of 
its  charter  and  constitutional  and  statutory  prohibitions,  has 
inherent  power  to  acquire  and  hold  any  property,  real  or 
personal,  reasonably  useful  or  convenient  in  carrying  on  the 
business  for  which  it  was  organiz^lf  ^  A  private  corporation — 
but  not  a  quasi-public  corporatiAi,  such  as  a  railroad — may 
even  dispose  of  its  entire  property  with  the  unanimous  consent 
of  the  stockholders,  providing  the  purpose  is  not  unlawful  nor 
fraudulent.  If  within  the  powers  expressly  granted  to  it,  it  may 
accept  stock  in  other  corporations  in  payment  for  the  property 
sold.  If  the  corporation  whose  property  is  to  be  disposed  of  is  a 
losing  one,  the  consent  of  only  a  majority  of  the  stockholders 
suffices;  and  this  is  also  true  in  the  case  of  a  prosperous  corpo- 
ration, when  the  sale  of  its  entire  assets  is  made  for  legitimate 
business  reasons.*  Though  some  trusts  were  organized  through 
sales  to  them  of  corporate  property,  it  is  hardly  necessary  to 
point  out  that  such  sales,  if  made  for  an  unlawful  purpose, 
were  ultra  vires  of  the  corporation. 

It  is  necessary  to  distinguish  between  a  sale  and  a  consolida- 
tion. In  a  sale  the  vendor  parts  solely  with  its  property,  for 
which  it  receives  a  quid  pro  quo.  The  vendor  may  then  proceed 
to  buy  further  property,  if  it  desires.  But  in  a  consolidation  the 
vendor  not  only  parts  with  its  property,  but  also  with  the  legal 
right  to  own  or  acquire  property.  Obviously  the  vendor  could 
not  receive  any  consideration  for  the  transfer;  for  the  act  of 
consolidation  involves  its  extinguishment.  The  fact  that  the 
consolidated  company  makes  payment,  not  to  the  vendor 
corporation,  but  to  its  stockholders,  characterizes  the  trans- 
action as  a  consolidation  rather  than  a  purchase;  if  the  trans- 

^  For  an  excellent  statement  of  the  law  relating  to  consolidation  of  corpora- 
tions, see  Noyes  on  Intercorporate  Relations  (second  edition),  sees.  7-107. 

*Noyes  on  Intercorporate  Relations  (second  edition),  sec.  108.  On 
the  subject  of  sales  of  corporate  property,  see  ibid.,  sees.  108-1 1 7. 

•  See  Warren,  Harvard  Law  Review,  30,  p.  358. 


action  were  merely  a  purchase  and  sale,  the  company  acquiring 
property  would  pay  the  vendor  corporation,  which  would  then 
settle  with  ita  stockholders. 

(3)  Exchange  of  property  for  stock.'    A  private  corporation 

may  not  only  sell  its  entire  assets,  as  just  explained,  but  it  mayl 

also  exchange  its  assets  for  any  other  property  that  it  is  on-l 

powered  to  acquire.   If  the  vendor  corporation  has  power  to  hold 

stock  in  another  corporation,  it  may  transfer  its  prq)erty  to  the 

prt^Ktsed  trust,  and  receive  its  stock  in  exchange.     Such  an 

exchange  difieis  from  a  sale  in'  this  respect,  inter  alia,  that  a  ia\e 

of  the  entire  property,  when  incident  to  dissolution,  may  be 

accomplished  on  occasion  through  a  majority  vote;  whereas  an 

exchange  of  the  entire  property  for  stock  requires  the  unanimous 

consent  of  the  stockholders^  the  majority  ^nnot  force  the 

minority  into-a  new  conipany  against  its  -wiH, 

— TBestock  received  in  the  process  of  exchange  belongs,  of 

course,  to  the  corporation  that  has  transferred  its  property.    But 

the  corporation,  with  the  unanimous  consent  of  its  stockholders, 

may  oiter  into  an  agreement  that  the  stock,  instead  of  being 

deUvered  to  it,  shall  be  distributed  among  its  stockholders  pro 

rata.   Such  an  agreement  is  the  equivalent  of  a  liquidation  of  the 

c<Hnpany's  business  by  unanimous  consent,  but  in  the  absence  of 

statutory  provisions  to  the  contrary  is  a  valid  arrangement. 

On  some   occasions  property   owning   trusts  were  formed 

through  the  use  of  the  holding  company  as  an  intermediary  stage. 

aving  acquired  a  majority  or  all  of  the 

companies  was  obviously  in  a  position, 

uired  all  of  the  stock,  to  cause  the  under- 

veyed  to  it,  and  the  separate  companies 

the  ctsnpletion  of  these  transactions  the 

representing  the  title  to  plants,  but  the 

jst  through  the  exchange  of  its  stock  for 
)anies  to  be  united  would  appear  to  have 
early  date  by  the  same  New  Jersey  law 
»  on  Intercoiporate  Relations  (second  edition)| 



to  which  reference  has  abeady  been  made.^  By  an  amendment 
to  section  55  of  its  general  incorporation  law  of  1875  the  state  of 
New  Jersey  in  1889  authorized  the  directors  of  any  company 
incorporated  imder  the  act  to  purchase  mines,  manufactories, 
and  other  property  necessary  for  their  business,  and  to  issue 
stock  in  payment  therefor.^  Apparently  New  Jersey  was  not 
influenced  by  the  popular  clamor  against  jtfusts,  and  did  not 
propose  to  stop  at  halfway  measures  of  protection. 

The  American  Tobacco  Company,  incorporated  in  New 
Jersey  in  1890,  illustrates  a  proper^  owning  trust,  as  distinct 
from  a  holding  company  trust.  This  com^ny,  among  the  first 
of  the  modem  trusts,  exchanged  its  ^apHdX^tutk /directly  for 

tV^P   plants    h^|<^ine<^<^   l^mnHq^    |^pH    ^f"^^    W^"   ^^   ^^^  cigarette 

companis^^  The  Continental  Tobacco  Company  (the  plug 
tobacco  trust),  organized  in  New  Jersey  in  1898,  was  the  same 
type  of  trust,^  as  was  also  the  second  American  Tobacco 
Company,  organized  in  1904  for  the  purpose  of  uniting  a  number 
of  tobacco  concerns  (including  the  original  American  Tobacco 
Company  and  the  Continental  Company)  that  had  been  held 
together  since  1901  through  the  Consolidated  Tobacco  Company 
(a  holding  company). 

The  American  Sugar  Refining  Company,  incorporated  in 
New  Jersey  in  1891,  is  another  early  property  owning  trust.^ 
The  Sugar  Refineries  Company  (the  "trust")  having  been 
declared  illegal,  the  trust  certificates,  by  agreement  among  all 
the  parties,  were  exchanged  for  the  shares  of  the  American 
Sugar  Refining  Company.  Through  the  acquisition  of  these 
trust    certificates,    the   American    Sugar   Refining    Company 

*  See  p.  30. 

'  See  the  General  Law  of  the  State  of  New  Jersey  concerning  Corpohitions, 
approved  April  7,  1875,  together  with  Acts  Amendatory  thereto  in  force 
July  I,  1889,  p.  34. 

*  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  p.  65. 

*  Report  of  the  Commissioner  of  Corporations  on  the  ToKacco  Industry, 
part  I,  pp.  QQ-ioo. 

*  Original  Petition  in  United  States  v.  American  Sugar  Refining  Company, 
pp.  47-50- 


secured  control  over  all  the  stock  of  (he  various  corporations  "■ 
formerly  controlled  by  the  trustees.  It  was  thus  temporarily  a 
holding  company.  The  next  step  was  to  have  the  several 
corporations  convey  to  it  their  entire  property,  whereupon  they 
were  dissolved.  The  result  was  to  make  the  American  Sugar 
Refining  Company  the  actual  owner  of  all  the  property  pre- 
viously held  in  trust  by  the  trustees  under  the  Sugar  Refineries 
Company  deed. 

In  passing,  the  relative  merits  of  holding  company  trusts  and 
property  owning  trusts  from  the  standpoint  of  trust  managers 
may  be  briefly  reviewed.'  The  chief  advantages  of  the  holding 
company  are :  (1)  it  makes  possible  the  creation  of  a  centralized 
administrationj__aDd  1^  at  the  same  time  maintains  the  in- 
dividuality of_  the  constituent  companies,  together  with  the 
■fpood  jvill  attaching  to  their  business;  (2)  through  the  incor- 
poratioiLof  individual  concerns  in  the  separate  states,  it  is  able 
more  easijyjo  comply  withJJie  laws  of  the  various  states,  such 
as,  for  examplet^a  law  that  foreign  corporations  may  not  hold 
real^^Se;  iind  (.^)  it  is  easy  to  form,  because  it  is  necessary  to 
acquire  only  a  majority  of  the  stock  of  the  separate  companies. 

On  the  other  hand,  it  is  open  to  serious  objections;  (i)  the    , 
perpetuation  of  the  individual  concerns  whose  stock  is  acquired    * 
results  in   the  creation  of  a  complex  business  and  financial     1 
structure,  a  set  of  wheels  within  wheels,  that  does  not  conduce  to 
the  maximum  operating  and  financial  efficiency;  and  (2)  in  case 
all  the  stock  of  the  constituent  concerns  is  not  acquired,  the  con- 
gh  the  ownership  of  only  a  part  of  the 
rom  ownership  in  large  measure,  and 
to  the  manipulation  of  accounts,  and 
of  stockholders  in  the  interests  of  an- 
iatisfaction  and  friction, 
ist  that  owns  the propertyoutrightare:  ' 
operttting  unit  with  a  resulting  con- 
esponsibility — under  this  type  of  trust 
nth  a  lot  of  individual  companies,  each 
at  greater  lenglh,  see  Hancy,  Business  Organ- 


having  its  own  officials  and  organization,  and  to  substitute  there- 
for a  single  concern  dominated  by  singleness  of  purpose;  and  (2) 
by  uniting  all  the  property  in  one  concern  it  makes  the  interests 
of  each  the  interests  of  all,  and  thus  eliminates  that  '^milking"  of 
one  group  by  another  which  occurs  not  uncommonly  under  the 
holding  company  device.  The  disadvantages  are:  (i)  it  sacrifices 
the  independence  of  the  separate  concerns,  and  thus  their  fran- 
chises and  firm  names;  (2)  it  can  not  accommodate  itself  so 
readily  to  local  conditions;  and  (3)  it  is  more  difficult  to  form, 
because  of  charter  and  statutory  restrictions.  Nevertheless,  as 
we  shall  see,  trusts  more  generally  took  this  form  rather  than 
the  holding  company  form. 

The  general  character  of  the  trust  movement  has  been  in- 
dicated.   There  remains  to  consider  its  extent. 

The  extent  of  the  movement  toward  combinatian  can  be 
statistically  stated  with  a  fair  d^ree  of  precision,  and  several 
such  compilations  are  available.^  A  similar  statistical  study  of 
the  trust  movement,  however,  can  not  be  made  by  an  independ- 
ent investigator;  to  secure  the  requisite  data  in  fullness  requires 
the  resources  and  authority  of  a  governmental  agency.  To  dis- 
cover and  enumerate  all  the  combinations  of  a  certain  size  (say 
capitalization)  is  easy;  but  to  determine  in  each  instance  whether 
the  combination  realized  monopoly  control  (that  is,  was  a  trust) 
is  quite  another  matter.  The  attempt  to  make  such  a  com- 
putation is  rendered  more  difficult  by  the  fact  that  a  combina- 
tion at  its  organization  may  not  possess  monopolistic  powers, 
but  subsequently  may  acquire  them.  The  National  Cordage 
Company  is  a  case  in  point.  It  has  seemed  best,  therefore,  to 
indicate  the  extent  of  the  trust  movement  by  using  the  statistics 
for  the  combination  movement,  with  a  caution  against  a  too 
literal  interpretation  of  the  figures  as  bearing  on  the  trust 

An  excellent  statistical  study  of  the  industrial  combinations 
formed  in  the  United  States  through  1900  has  been  made  by  Mr. 

>See,  for  example,  Conant,  Publications  of  the  American  Statistical 
Association,  7,  pp.  208-217  (March,  1901);  U.  S.  Census,  1900,  vol.  7, 
pp.  LXXXVI  seq.;  and  Moody,  The  Truth  about  the  Trusts,  pp.  453  seq. 


Luther  Conant,  subsequently  C(»mnissioner  of  Corporations.^ 
The  following  table,  prepared  by  him,  shows  the  number  of  in- 
dustrial ccmibinations,  with  a  capital  of  $1,000,000  or  over,  ef- 
fected from  1887  to  1900,  with  their  authorized  capitalization: 

Total  capikUwtion, 
Year  Number  of  combinations  stocks  and  bonds 

1887 8 $2l6,226,OCX> 

1888 3 23,6oo,ocx> 

i88g 12 i52,i79,ocx> 

1890 13 i5S,i56/x)o 

1891 17 166,200,000 

1892. 10 193,412,000 

1893 6 239,oi5/x)o 

1894 2 30,400,000 

1895 6 107,255,000 

1896 5 49,850,000 

1897 4 81,000,000 

ToUl  (1887-1897) 86.. 4i,4i4»293,ooo 

1898 20 $708,600,000 

1899 87 2,243,995,000 

1900 42 831,415,000 

Total  (1898-1900) 149 $3,784,010,000 

Total  (1887-1900) 235 $5ii98>303»ooo 

During  the  eleven  years  1887-1897,  therefore,  there  were 
formed  86  industrial  combinations  with  an  authorized  capital 
of  $1,414,000,000.  Some  of  these  combinations  were  trusts 
also,  that  is,  they  exercised  monopolistic  control  over  the 
industry;  but  by  far  the  greater  number  were  simply  combina- 
tions. The  list  includes  five  brewing  companies,  each  a  combi- 
nation, but  none  of  them  a  trust;  and  the  whisky  trust  in  its 
various  forms  is  counted  three  times.  The  list  includes  the  sugar 
trust  twice,  once  as  the  Sugar  Refineries  Company,  and  again  as 
the  American  Sugar  Refining  Company.  It  includes  four  steel 
companies,  none  of  which  was  a  trust.    The  number  of  actual 

*  Publications  of  the  American  Statistical  Association,  7,  pp.  207-226 
(March,  1901). 


trusts  formed  from  1887  (the  date  of  the  formation  of  the  last 
"trust")  to  1897  is  thus  considerably  less  than  the  number  of 
combinations.  Probably  not  more  than  twenty,  or  at  most 
twenty-five,  of  these  combinations  secured  a  sufficient  control 
of  the  industry  to  be  called  trusts. 

Among  the  more  important  trusts  formed  between  1887  and 
1897  were  the  following:  National  Cordage  Company  (1887); 
American  Cotton  Oil  Company  (1889);  Diamond  Match  Com- 
pany (1889);*  American  Tobacco  Company  (1890);  Distilling 
and  Cattle  Feeding  Company  (1890);  National  Starch  Manu- 
facturing Company  (1890);  American  Sugar  Refining  Company 
(1891);  National  Wall  Paper  Company  (1892);  United  States 
Leather  Company  (1893);  American  Malting  Company  (1897); 
and  Glucose  Sugar  Refining  Company  (1897).^ 

Nearly  all  of  these  trusts  represented  combination  by  consoli- 
dation or  purchase  rather  than  by  means  of  a  holding  company. 
The  cordage,  match,  cigarette,  whisky,  starch,  sugar,  leather, 
malt,  and  glucose  trusts  were  property  owning  combinations. 
The  cotton  oil  trust,  on  the  other  hand,  was  a  holding  company. 
No  doubt  there  were  others  that  took  this  form  also,  though  the 
paucity  of  data  on  this  subject  makes  it  difficult  to  determine 
just  which  ones  they  were. 

The  real  trust  movement,  however,  dates  from  1898.  This 
is  indicated  by  the  statistics  for  combinations.  Reference  to  the 
table  on  page  39  shows  that  in  the  years  1898  to  1900  there 
were  formed  149  combinations,  with  a  total  capital  of  $3,784,- 
000,000.  In  three  years  almost  twice  as  many  combinations  were 
formed  as  in  the  preceding  eleven  years;  and  the  capital  of  the 
combinations  organized  during  the  shorter  period  exceeded  by 
more  than  two  and  one-half  times  the  capital  of  those  organized 
during  the  longer  period.  In  the  year  1899  alone,  when  the  trust 
movement  reached  its  climax,  more  combinations  with  a  much 
larger  aggregate  capitalization  were  formed  than  in  the  eleven 

*This  company,  incorporated  in  Illinois,  was  a  successor  to  another 
company  of  the  same  name  incorporated  in  Connecticut  in  1880  for  the  pur- 
pose of  monopolizing  the  match  industry.    See  77  Michigan  Reports  635. 

•  Seven  of  these  eleven  trusts  were  chartered  in  New  Jersey. 


years  from  1887  to  1897.  The  absorption  of  this  mass  of  se- 
curities proved  to  be  such  an  enormous  task  that  in  the  latter 
part  of  1899  and  in  1900  the  promoters  had  difficulty  in  induc- 
ing the  bankers  to  float  and  the  public  to  buy  new  issues.  Never- 
theless, 42  combinations  with  a  combined  capitalization  of 
$831,000,000  were  formed  in  1900. 

As  in  the  period  1887-1897,  by  far  the  greater  nimiber  of 
these  combinations  were  simply  combinations;  they  did  not  re- 
sult in  the  formation  of  an  organization  large  enough  to  control 
the  industry.  In  the  list  of  149  combinations,  we  find,  for  ex- 
ample, seventeen  in  the  steel  industry.  Several  of  these  unques- 
tionably possessed  a  degree  of  monopoly  control  over  certain 
kinds  of  steel  products — the  American  Steel  and  Wire  Company 
of  New  Jersey,  the  American  Tin  Plate  Company,  the  National 
Tube  Company,  and  the  Shelby  Steel  Tube  Company  are  prop- 
eriy  designated  as  trusts.  But  just  as  clearly,  certain  other  of 
these  steel  combinations  were  in  no  sense  trusts.  This  was  true 
of  the  Empire  Steel  and  Iron  Company,  the  Republic  Iron  and 
Steel  Company,  the  Sloss-Sheffield  Steel  and  Iron  Company, 
Jones  and  Laughlin,  and  several  others;  and  was  even  true  of 
such  enormous  combinations  as  the  Federal  Steel  Company,  the 
National  Steel  Company,  and  the  Carnegie  Company,  each  a 
vigorous  competitor  of  the  others,  as  subsequent  events  well 
demonstrated.  We  also  find  in  our  list  of  combinations  nine  in 
the  liquor  trade,  in  addition  to  those  effected  prior  to  1898.  For 
the  most  part  these  were  merely  local  combinations.  In  addition 
there  were  four  tobacco  combinations,  three  brick  and  three  fer- 
tilizer combinations,  and  two  ice  and  two  biscuit  combinations. 
Most  of  these  concerns  obviously  were  not  trusts.  Though 
most  of  the  companies  promoted  from  1898  to  1900  were  simply 
combinations,  it  is  still  true  that  this  was  the  period  during 
which  the  modem  trust  movement  reached  its  height.  Some 
forty  to  fifty  of  these  combinations  achieved  a  monopolistic  posi- 
tion in  their  particular  industry;  and  this  was  approximately 
— an  approximate  statement  is  all  that  can  be  made — twice  the 
number  of  trusts  organized  during  the  preceding  eleven  years. 

Some  of  the  leading  trusts  organized  during  1898-1900  were: 


the  American  Tin  Plate  CcHnpany  (1898);  Continental  Tobacco 
Company  (1898);  International  Silver  Company  (1898);  Inter- 
national Paper  Company  (1898);  American  Linseed  Company 
(1898);  Otis  Elevator  Company  (1898);  Standard  Oil  Company 
of  New  Jersey  (1899);^  United  Shoe  Machinery  Company  (1899); 
American  Steel  and  Wire  Company  of  New  Jersey  (1899); 
National  Tube  Company  (1899);  American  Bicycle  Company 
(1899);  American  Chicle  Company  (1899);  Asphalt  Company 
of  America  (1899);  National  Glass  Company  (1899);  National 
Salt  Company  (1899);  Standard  Sanitary  Manufacturing  Com- 
pany (1899);  New  England  Cotton  Yam  Company  (1899); 
Mount  Vemon-Woodberry  Cotton  Duck  Company  (1899);  Amer- 
ican Sheet  Steel  Company  (1900);  Shelby  Steel  Tube  Company 
(1900);  and  American  Snuflf  Company  (1900).*  By  no  means 
all  of  these  companies  retained  their  monopolistic  hold  for  any 
considerable  time,  yet  all  of  them  either  at  their  organization  or 
shortly  thereafter  exercised  monopoly  control. 

There  were  other  trusts  established  during  this  period  that 
were  so  notably  unsuccessful  that  one  hesitates  to  class  them 
with  the  above.  Among  them  were  the  following:  National 
Shear  Company  (1898);  United  States  Envelope  Company 
(1898);  American  Hide  and  Leather  Company  (1899);  and 
American  Writing  Paper  Company  (1899).  Indeed  some  of  the 
trusts  in  the  earlier  list  might  well  be  placed  in  this  group, 
particularly  the  American  Bicycle  Company,  the  National  Salt 
Company,  the  New  England  Cotton  Yam  Company,  and  the 
Mount  Vemon-Woodberry  Cotton  Duck  Company. 

Comparatively  few  of  the  tmsts  formed  between  1898  and 
1900  were  holding  companies.  The  most  striking  exception  was 
the  Standard  Oil  Company  of  New  Jersey,  which  adopted  the 
holding  company  plan  as  a  substitute  for  the  conmiunity  of 
interest  arrangement  that  had  been  in  force  since  1892,  but 
which  it  seemed  wise  to  abandon  in  1899  in  view  of  the  attacks 
being  made  upon  it  by  the  state  of  Ohio. 

^  Reorganization  as  a  holding  company. 

•  Eighteen  of  the  twenty-one  trusts  enumerated  above  were  incorporated 
in  New  Jersey. 


Even  after  1900,  when  there  was  somewhat  of  a  lull  in  the 
trust  movement,  the  formation  of  trusts  continued  on  a  large 
scale  up  to  1904.  A  table  prepared  by  Mr.  John  Moody  gives  a 
list  of  the  combinations  organized  to  1904.^  From  this  table  it 
a{q[)ears  that  46  combinations  (each  with  an  outstanding  capital 
of  SiyOoOyOoo  or  over)  were  formed  in  1901 ;  63  in  1902;  and  18  in 
1903,  making  a  total  of  127  during  the  three  years.  If  we  note 
that  Mr.  Moody's  list  is  not  as  exhaustive  as  Mr.  Conant's,^ 
it  would  appear  that  substantially  as  many  combinations  were 
formed  during  the  three  years  from  1901  to  1903  as  during  the 
three  years  from  1898  to  1900.  A  detailed  study  of  the  combin- 
ations organized  between  1901  and  1903,  however,  reveals  the 
fact  that  they  were  mainly  combinations  of  limited  scope;  the 
number  of  them  that  were  trusts  was  distinctly  less  than  in  the 
preceding  three-year  period.  Hardly  more  than  twenty  of  them 
were  trusts,  as  compared  with  some  forty  or  fifty  diuing  1898  to 
1900.  The  leading  trusts  organized  between  1900  and  1903  were: 
the  United  States  Steel  Corporation  (1901) ;  American  Can  Com- 
pany (1901);  International  Harvester  Company  (1902);  Com 
Products  Company  (1902);  and  International  Nickel  Company 
(1902).'  During  this  period  also  a  number  of  important  re- 
organizations took  place.  The  Consolidated  Tobacco  Company 
was  formed  in  1901  to  unite,  through  the  holding  company  ar- 
rangement, the  American  Tobacco  Company  (the  cigarette 
trust)  and  the  Continental  Tobacco  Company  (the  plug  tobacco 
trust).  Other  companies  that  represented  trust  reorganizations 
ol  one  kind  or  another  were:  Eastman  Kodak  Company  (1901); 
International  Salt  Company  (1901);  United  States  Cotton  Duck 
Corporation  (1901);  Distillers  Securities  Corporation  (1902); 
American  Coal  Products  Company  (1903);  General  Asphalt 
Company  (1903) ;  E.  I.  du  Pont  de  Nemours  Powder  Company 
(1903);  P<^  Manufacturing  Company  of  New  Jersey  (1903).* 

*  The  Truth  about  the  Trusts,  pp.  453-467. 

*  For  example,  Mr.  Conant  included  all  combinations  having  an  authorized 
capital  of  $1,000,000  or  more,  whereas  Mr.  Moody  included  only  those  hav- 
ing an  ouistanding  capital  of  this  amount. 

*  All  of  these  five  trusts  were  incorporated  in  New  Jersey. 

*  A  reorganization  of  the  American  Bicycle  Company. 


In  1903  a  merger  of  the  leading  meat  packers  was  proposed,  but 
it  did  not  come  to  pass.  Instead  the  National  Packing  Company 
was  organized,  and  throiigh  it  a  community  of  interest  was 
eflFected,  or,  perhaps  one  should  say,  maintained. 

The  organization  of  trusts  seems  to  have  come  rather  def- 
V  initely  to  an  end  by  the  close  of  1903.  iThe  stock  market  panic 
of  1903,  ascribable  to  the  large  mass  of  '* undigested  securities"; 
^  the  popular  opposition  to  trusts  that  was  reflected  in  the  crea- 
tion of  the  Bureau  of  Corporations  in  1903  y the  Northern  Se- 
y  curities  decision  in  1904,  casting  by  implication  grave  suspicion 
on  the  legality  of  trusts — all  combined  to  dull  the  public  appetite 
for  trust  stocks,  and  thus  to  make  their  manufacture  no  longer 
particularly  profitable.  Moreover,  by  the  close  of  1903,  most 
of  the  industries  that  were  at  all  adapted  to  monopolization, 
and  many  that  were  not,  had  been  "trustified";  and  accord- 
ingly the  period  that  followed  was  mainly  characterized  by  the 
endeavor,  often  unsuccessful,  of  the  trusts  to  hold  the  position 
they  had  gained. 

Whereas  up  to  1900  the  most  common  form  of  trust  organiza- 
tion was  a  single  corporation  owning  the  various  properties  out- 
right,* after  1900  and  up  to  the  Northern  Securities  decision  the 
holding  company  form  vied  with  it  in  popularity.  The  steel 
trust  was  a  holding  company  trust;  the  cigarette  and  plug  to- 
bacco trusts  were  tied  together  through  a  holding  company;  and 
holding  companies  were  made  use  of  in  the  gunpowder,  whisky, 
and  meat  industries.  On  the  other  hand  the  harvester,  tin  can, 
and  glucose  trusts  took  the  property  owning  form;  and  the 
powder  trust  proceeded  to  substitute  this  form  for  the  holding 
company.  But  in  1904  the  Supreme  Court  in  the  Northern 
Securities  case  ^  held  the  combination  of  two  competing  railroads 
through  a  holding  company  to  be  illegal,  and  thereafter  the 
other  type  of  organization  came  into  renewed  favor.  In  the  to- 
bacco industry,  for  example,  there  was  straightway  formed  the 
second  American  Tobacco  Company,  which  proceeded  to  ac- 
quire the  property  of  the  concerns  formerly  controlled  by  the 

*  See  Industrial  Commission,  I,  p.  10  (ReWew  of  Evidence). 
«  See  p.  399. 


Consolidated  Tobacco  Company,  the  holding  company  organ- 
ized in  1901.  Yet  the  property  holding  corporation,  like  the 
holding  company,  could  not  pass  the  legal  tests,  when  entered 
into,  as  in  this  instance,  to  effect  an  illegal  object.  In  191 1  the 
Supreme  Court  held  the  tobacco  merger  illegal.  In  the  same 
year  the  Supreme  Court  adjudged  the  Standard  Oil  Company  of 
New  Jersey  illegal,  not  because  it  was  a  holding  company,  but 
because  it  had  effected  a  restraint  of  trade.  From  these  de- 
cisions it  clearly  appears  that  neither  the  holding  com])any  nor 
the  maimer  is  l^al,  when  used  to  effect  an  ill^al  object. 


Mr.  G.  H.  Montague  in  the  preface  of  his  book  "The  Rise  and 
Progress  of  the  Standard  Oil  Company"  observes  that  the  oil 
business,  in  its  early  phase,  was  the  reflex  of  prevalent  railway 
methods,  and  that  it  is  not  fair  to  attempt  to  judge  the  situation 
without  first  ascertaining  the  standards  set  by  the  railway 
management  of  the  time.  It  does  not  fall  within  the  province  of 
this  treatment  to  judge  the  Standard  Oil  Company,  but  merely 
to  point  out  some  of  the  methods  by  which  it  acquired  its  power. 

The  first  successful  oil  well  was  drilled  at  Titusville,  Pennsyl- 
vania, in  1859.  This  great  event  was  followed  by  the  discovery 
of  other  oil  deposits,  and  by  the  rapid  development  of  the  demand 
for  refined  petroleum  products.  At  that  time  Mr.  John  D.  Rocke- 
feller, only  twenty  years  of  age,  was  engaged  in  the  produce 
commission  business  on  the  Cleveland  docks.  But  Mr.  Rocke- 
feller early  foresaw  the  possibilities  in  the  oil  business,  and  in 
1862  he  and  his  partner,  who  had  made  excellent  profits  in  the 

*  On  the  Standard  Oil  Company  see:  Report  of  the  Commissioner  of  Cor- 
porations on  the  Transportation  of  Petroleum,  May  2,  1906;  Report  of  the 
Commissioner  of  Corporations  on  the  Petroleima  Industry,  part  I,  Position  of 
the  Standard  Oil  Company  in  the  Petroleimi  Industry  (May  20, 1907),  and 
part  II,  Prices  and  Profits  (August  5,  1907);  Report  of  the  Federal  Trade 
Commission  on  Pipe-Line  Transportation  of  Petroleum;  Report  of  the 
Federal  Trade  Commission  on  Price  of  Gasoline  in  191 5;  Brief  for  the  United 
States,  in  two  volumes,  in  Standard  OO  Company  v.  United  States  (no.  725); 
Brief  for  Appellants  (Standard  Oil  Company  et  al.)}  in  two  volumes,  in 
Standard  Oil  Company  v.  United  States  (no.  725);  173  Fed.  Rep.  177-200; 
221  U.  S.  i-io6;  House  Report  no.  3112,  50th  Cong.,  ist  Sess.;  Industrial 
Commission,  vol.  I,  pp.  261-800;  49  Ohio  State  Reports  137-189;  218  Mis- 
souri Reports  1-507;  Tarbell,  The  History  of  the  Standard  Oil  Company,  in 
two  volumes;  Lloyd,  Wealth  Against  Commonwealth;  Montague,  the  Rise 
and  Progress  of  the  Standard  Oil  Company.  (For  full  titles  see  the  Bibli- 



produce  business  as  the  result  (rf  the  unusual  demands  created  by 
the  Civil  War,  invested  $4,000  in  an  oil  refinery,  which  one 
-Samuel  Andrews  was  anxious  to  start.  Mr.  Andrews  proved  to 
be  a  mechanical  genius,  and  the  little  refinery  at  Cleveland  be- 
came quite  profitable.  In  1865  Mr.  Rockefeller  disposed  of  his 
interest  in  the  commission  house,  and  entered  into  a  partnership 
with  Mr.  Andrews.  The  partnership  of  Rockefeller  and  Andrews 
associated  itself  also  with  Mr.  William  Rockefeller  in  the  firm  of 
William  Rockefeller  and  Company,  and  this  new  firm  built 
another  refinery  on  property  adjacent  to  the  works  of  Rocke- 
feller and  Andrews.  These  two  concerns  then  organized  the  firm 
of  Rockefeller  and  Company,  a  selling  agency  with  headquarters 
at  New  York  City.  Mr.  Rockefeller  was  one  of  the  first  to  see 
that  by  producing  on  a  larger  scale  improvements  in  the  process 
of  refining  could  be  brought  about,  and  the  by-products  more 
efiFectively  utilized.  In  1867,  therefore,  the  three  Rockefeller 
firms  united  witbOJie  firms  S.  V.  JIarkness  and  H.  M.  Flagler  into 
a  new  concern  called  Rockefeller,  Andrews  and  Flagler. 

In  1870  (June)  the  Standard  Oil  Company  of  Ohio  was 
incorporated  with  a  capital  stock  of  $1,000,000.  This  company 
took  over  the  properties  of  the  partnership  to  which  it  suc- 
ceeded. The  Standard  Oil  Company  was,  even  at  this  time,  the 
largest  oil  concern  in  the  country.  It  produced  about  10  per 
cent  of  the  country's  output  of  refined  oil.^  But  it  operated  no 
refineries  outside  of  Cleveland,  was  not  engaged  in  the  production 
of  crude  oil,  and  had  as  competitors  some  250  concerns.^  By 
1879,  however,  the  Standard  Oil  Company,  according  to  the 
statement  of  its  officials,  controlled  from  90  to  95  per  cent  of  the 
refining  business  of  the  coimtry.'  By  what  means  was  a  com- 
pany occupying  such  a  modest  position  in  1870  able  so  efiFec- 
tively to  eliminate  its  competitors?  According  to  the  Commis- 
sioner of  Corporations,  "imquestionably,  the  most  important 
single  element  in  this  early  extension  of  the  company's  power 

'  Report  of  the  Commissioner  of  Corporations  on  the  Petroleum  Industry, 
part  I,  p.  48.   Referred  to  hereafter  as  Report  on  the  Petroleum  Industry. 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  48. 

*  Report  of  Hepburn  Committee  (New  York),  pp.  2615,  2695. 


was  the  railroad  rebate. "  ^  It  is  true  that  the  progress  of  the  in- 
dustry in  the  seventies  necessitated  production  on  a  considerable 
scale,  and  that  the  refiners  who  were  not  able  to  expand  their 
operations  were  doomed  in  the  competitive  struggle.  But  the 
economies  of  large-scale  production  were  secured  by  a  consider- 
able number  of  refiners,  and  hence  the  ability  to  produce  on  a 
large  scale  does  not  explain  the  growing  preeminence  of  the 
Standard  Oil  Company — ^and  especially  since  advantages  in 
freight  rates  easily  more  than  offset  unusual  economies  in 

The  real  struggle  in  the  seventies,  therefore,  was  to  secure 
special  railroad  rates.  And  the  railroad  situation  was  such  that 
the  opportunities  in  this  direction  were  exceptional.  There  had 
been  rate  wars  between  the  Pennsylvania  Railroad  and  the  New 
York  Central  Railroad  as  early  as  1869,  the  year  in  which  both 
of  these  roads  secured  connection  with  Chicago.  With  the 
entrance  into  Chicago  during  the  seventies  of  other  railroads — 
notably  the  Baltimore  and  Ohio  and  the  Grand  Trunk — 
competition  among  the  railroads  for  traffic  became  still  more 
intense.  The  Standard  Oil  Company,  as  it  happened,  was  well 
situated  to  demand  special  rates  on  its  oil  traffic.  Its  refineries 
at  Cleveland  were  served  by  two  railroads  to  New  York  City — 
the  New  York  Central  and  the  Erie — and  also  had  water 
conmiunication  to  the  East  by  way  of  the  Great  Lakes  and  the 
Erie  Canal.  If  railroad  rates  were  unsatisfactory,  there  was  this 
alternative  water  route.  The  railroads  thus  found  themselves 
compelled  to  grant  greater  and  greater  concessions  to  the 
refiners  at  Cleveland,  and  the  Standard  Oil  Company  being  the 
largest  refining  concern  naturally  received  at  least  its  share.  But 
the  Standard  Oil  Company  was  ambitious,  apparently,  to  secure 
a  still  larger  share;  and  through  the  South  Improvement  Com- 
pany scheme  was  successful  in  efifecting  this  end. 

The  South  Improvement  Company  was  a  Pennsylvania 
corporation  organized  in  January,  1872,  under  a  charter  granted 
in    1870,   conferring  almost   unlimited   powers.^     The   South 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  22. 
« Ibid.,  p.  55. 



Improvement  Company,  which  was  backed  mainly  by  certain  re- 
finers in  Cleveland  and  Pittsburg,  was  controlled  by  the  Stand- 
ard Oil  group.  The  function  ofthis  company  was  to  negotiate 
with  the  railr^ids  lor  speciaFrates  in  return  for  the  privil^e 
of  car^thg  "tSelarge  amount  of  trafSc  at  the  disposal  of  the 
conipany — rates  much  lower  San  were  to  be  given  to  refiners  not 
included  in  the  South  Improvement  Company  organization. 
In  this  plan  the  company  was  highly  successful.  It  entered  into 
contracts  with  the  Pennsylvania  Railroad,  the  New  York 
Central,  and  the  Erie,  whereby  its  oil  traffic  was  to  be  divided 
among  these  three  railroads  in  certain  proportions.^  These 
contracts  specified  the  rates  on  oil  from  the  oil  fields  to  the 
refining  centers  and  to  the  seaboard,  and  expressly  provided  for 
rebates  from  these  gross  rates  on  all  oil  transported  for  the  South 
Improvement  Company.  They  further  provided  that  similar 
rebates  should  be  given  to  the  South  Improvement  Company  on 
all  oil  carried  for  other  parties.  As  is  brought  out  in  a  table  in 
the  report  of  the  Commissioner  of  Corporations,  the  rebates 
ranged  from  about  40  to  50  per  cent  of  the  gross  rates  in  the  case 
of  crude  oil,  and  from  about  25  to  45  per  cent  in  the  case  of 
refined  oU.*  Moreover,  the  contracts  had  other  objectionable 
features.  They  established  very  much  higher  gross  rates  on 
refined  oil  from  points  in  the  oil  regions  than  applied  from  Cleve- 
land and  Pittsburg,  where  the  leading  concerns  in  the  South 
Improvement  Company  were  located  (the  rates  from  the  oil 
r^on  should  have  been  at  least  as  low,  and  perhaps  lower  than 
those  from  either  Cleveland  and  Pittsburg);  and  they  provided 
that  *^**  Sv\1th  Tmprn^'^""^""^ -^^^^^p^'^y  should  be  supplied 
with  ^plicate  copin  of  th"  wfiyH^I"  "f  nH  ^^'^  f^hip^f"*^^. 
these  waybills  to  show  the  name  of  the  consignor,  the  place  of 
shipment,  the  exact  kind  and  quantity  of  product  shipped,  the 
name  of  the  consignee,  and  the  destination  of  the  shipments. 
The  South  Improvement  Company,  as  the  Commissioner  of 
Corporations  pointed  out,   was    thus   to   be  provided  with 

*  A  copy  of  the  contract  entered  into  with  the  Pennsylvania  Railroad  is  in 
House  Report  no.  31 12,  50th  Cong.,  ist  Sess.,  vol.  9,  pp.  357-361. 
'  Report  on  the  Petroleum  Industry,  part  I,  p.  56. 



xromplete  facilities  for  e^ionage  upon   the  shipments  of  its 

The  South  Improvement  CcHnpany  with  its  favorable  con- 
tracts thus  became  a  powerful  dub,  which  mi^t  be  used  by  the 
Standard  Oil  Company  in  the  fight  against  its  competitors.  The 
government  in  its  suit  against  the  Standard  CMl  Company 
charged  that  it  was  clearly  the  intention  of  the  South  Im- 
provement Company  to  use  these  contracts  to  force  into  the 
Standard  Oil  Company  such  refineries  as  were  wanted,  and  to 
crush  out  the  balance.*  This  certainly  to  a  considerable  degree 
was  the  outcome.  Within  three  months  practically  the  entire 
independent  oil  business  of  Cleveland  succumbed.  At  least 
twenty  of  the  twenty-five  independent  refineries  sold  out  to  the 
Standard.  As  a  result  the  capacity  of  the  Standard  Oil  Com- 
pany increased  from  about  1,500  barrels  of  crude  oil  a  day  to 
10,000  barrels  a  day.^  The  Standard  Oil  Company  upon  the 
completion  of  this  transaction  had  a  capacity  greater  than  that  of 
all  the  refiners  in  the  oil  creek  regions  put  together,  and  greater 
also  than  that  of  all  the  New  York  refiners.  Whereas  in  1870  it 
had  refined  about  10  per  cent  of  all  the  oil  in  the  country,  it  now 
refined  over  20  per  cent. 

The  South  Improvement  Company  contracts,  signed  on 
January  18,  1872,  went  into  effect  on  February  26.*  Naturally 
they  aroused  the  most  bitter  antagonism  on  the  part  of  the  inde- 
pendent oil  interests.  A  mass  meeting  was  promptly  held  at 
Titusville,  Pennsylvania,  and  an  organization  to  fight  the  South 
Improvement  Company  was  formed.  An  embargo  was  at  once 
imposed  on  the  sale  of  oil  to  the  South  Improvement  Company, 
and  committees  were  sent  to  the  l^islature  of  Pennsylvania  and 
to  Congress  to  enter  protest. 

This  agitation  produced  thedesired  effect.  On  March  25, 1872, 
the  railroads  signed  a  contract  with  the  independents  that  all 
shipping  of  oil  should  hereafter  be  made  on  '*a  basis  of  perfect 
equality  to  all  shippers,  producers,  and  refiners,  and  that  no 

*  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  12. 

■  Tarbell,  The  History  of  the  Standard  Oil  Company,  vol.  I,  pp.  67-68. 

*  Montague,  Rise  and  Progress  of  the  Standard  Oil  Company,  p.  28. 


rebates,  drawbacks,  or  other  arrangements  of  any  character 
shall  be  made  or  allowed  that  will  give  any  party  the  slightest 
difference  in  rates  or  discrimination  of  any  character  whatever." ' 
On  March  28  the  railroads  officially  annulled  their  contracts 
with  the  South  Improvement  Company,  and  put  into  force  a  new 
.  schedule  of  rates  ranging  about  40  per  cent  lower  than  those 
stipulated  in  the  contracts.  And  on  April  6, 1872,  the  legislature 
of  Pennsylvania  deprived  the  South  Improvement  Company  of 
its  charter. 

Yet  the  Standard  Oil  Company  continued  to  receive  special 
rates.  In  1879  Mr.  H.  M.  Flagler,  Mr.  Rockefeller's  partner,  pro- 
duced, beforean  Ohio  Legislative  Committee,  contracts  showing 
that  from  the  first  of  April,  1872,  to  the  middle  of  November, 
1872,  the  Standard  Oil  Company  had  an  east-bound  rate  on  the 
NewYork  Central  of  $1.25  per  barrel  of  refined  oil.  This  was  25 
cents  less  than  that  provided  for  in  the  agreement  of  March  25, 
1872,  between  the  railroads  and  the  independents,'  Other 
instances  of  rebates  in  the  seventies  are  cited  in  the  report  of  the 
Commissioner  of  Corporations.*  According  to  theCommissioner, 
at  almost  every  turn  rates  were  adjusted  or  manipulated  in  favor 
of  the  Standard  Oil  Company,  and  these  favors  were  shown 
the  company  at  a  time  when  they  were  of  peculiar  value — that  is, 
when  it  was  endeavoring  to  establish  its  supremacy  in  the  oil 
industry.*  During  this  early  period  rebates  were  given  to  inde- 
pendent shippers  also,  but  the  concessions  obtained  by  the 
Standard  Oil  interests  were  much  greater  than  those  obtained  by 
their  competitors. 

Having  acquired  the  refineries  in  its  own  district  (Cleveland), 

the  Standard  Oil  Company  proceeded  to  extend  the  sphere  of  its 

athered  in  the  important  refineries  of 

l»ny  of  Philadelphia,  Charles  Lockhart 

es  Pratt  and  Company  of  New  York. 

oth  Conp.,  1st  Sess.,  vol.  0,  p.  361. 

he  Slandani  Oil  Com|>.iny,  vol.  I,  p.  100.    See 

Tndustry,  p.-irt  I,  pp.  58  fF. 


The  subsequent  acquisitions  of  the  Standard  Oil  Company  were 
promoted  by  the  organization  in  1874  of  an  "alliance"  known  as 
the  Central  Association  of  Refiners,  Mr.  John  D.  Rockefeller 
being  its  president.  This  association,  which  reminds  one  in  some 
respects  of  the  South  Improvement  Company,  included  a  large 
percentage  of  the  refining  capacity  of  the  country.  The 
association  agreement  provided  that  the  members  were  to 
operate  their  own  refineries,  but  that  the  Standard  Oil  Company 
was  empowered  to  determine  the  quantity  of  their  output,  to  buy 
all  their  crude  oil  and  to  sell  all  their  refined  oil,  and  to  negotiate 
with  the  railroads  and  pipe-lines  as  to  freight  rates.^  It  was  thus 
a  pool,  and  one  that  was  able  to  bring  great  pressure  to  bear  on 
the  carriers.  The  formation  of  this  association  was  followed  by 
the  rapid  decline  of  the  independent  element.  Within  three  or 
four  years  practically  all  of  the  independent  refiners  in  the  oil 
regions  of  northwestern  Pennsylvania  had  either  gone  out  of 
business  or  had  sold  to  the  Standard  party.^  Simultaneously,  the 
independent  group  in  the  Pittsburg  district  was  being  rapidly 
absorbed;  between  1875  and  1877  some  twenty  independent 
plants  were  acquired  by  Standard  Oil  interests.  By  1877,  more- 
over, practically  the  entire  group  of  independent  refiners  in  Bal- 
timore had  succumbed.  As  the  result  of  these  acquisitions, 
made  possible  in  many  cases  by  pressure,  the  Standard  Oil' 
Company  and  allied  interests  had  secured  by  1879,  as  noted 
above,  from  90  to  95  per  cent  of  the  refining  capacity  of  the 

The  Standard  Oil  Company  was  greatly  aided  in  this  enlarge- 
ment of  its  business  by  its  control  of  pipe-lines  for  transporting 
crude  oil  from  the  oil  wells  to  the  railroads.  The  building  of 
local  pipe-lines  in  the  oil  fields  was  begun  in  1865.  The  Standard 
Oil  Company  did  not  originate  pipe-line  transportation,  nor 
did  it  build  any  of  the  lines  laid  down  in  the  first  eight  years.' 
But  quite  early  its  guiding  spirits  realized  the  imix)rtance  of 
getting  control  of  the  pipe-lines.    The  entrance  of  the  Standard 

'  Report  on  the  Petroleum  Industr>',  part  I,  pp.  4(^-50. 

*  Ibid.,  p.  50. 

*  Brief  for  the  United  States  (no.  725),  vol.  I,  pp.  45-46. 


Oil  group  into  the  pipe-line  business  came  in  1873.    In  that  year 
J.  A.  Bostwick  &  Company — Mr.  Bostwick  was  affiliated  with  the 
Standard  Oil  Company — built  a  local  pipe-line  in  northwestern 
Pennsylvania.    This  concern  later  became  the  American  Trans- 
fer Company,  and  as  such  was  definitely  a  part  of  the  Standard 
organization.    In  1874  Standard  Oil  interests  secured  one-third 
of  the  stock  of  the  United  Pipe  Lines,  a  company  credited  with 
30  per  cent  of  the  pipe-line  business  of  the  Pennsylvania  oil 
fields  region.    The  United  Pipe  Lines  with  its  new  affiliations 
was  able  to  secure  favors  from  the  railroads.    It  entered  into  an 
agreement  with  the  New  York  Central  and  the  Erie,  by  which 
it  was  to  apportion  to  each  road  50  per  cent  of  its  traffic,  and  in 
return  was  to  receive  a  rebate  of  10  per  cent  on  all  its  shipments.^ 
The  other  pipe-line  systems  likewise  arrayed  themselves  with 
some  railroad.     The  Empire  Transportation  Company  allied 
itself  with  the  Pennsylvania  Railroad,  and  began  the  construc- 
tion of  oil  refineries.    The  Standard  Oil  Company,  not  welcom- 
ing competition,  and  particularly  when  backed  by  railroad 
support,  demanded,  but  without  success,  that  the  Empire  Trans- 
portation Company  give  up  its  refineries.    At  the  suggestion  of 
the  New  York  Central  and  the  Erie,  which  would  have  been  in- 
jured by  the  resulting  diversion  of  oil  traffic  to  the  Pennsylvania, 
the  Standard  Oil  Company  in  March,  1877,  ceased  shipping 
freight  over  the  Pennsylvania.    This  precipitated  a  stru^le, 
which  lasted  for  six  months.    In  one  instance  the  Pennsylvania 
transported  oil  at  a  rate  that  was  8  cents  per  barrel  below  cost,^ 
and  the  Empbe  Transportation  Company  sold  oil  in  the  terri- 
Uliance"  at  very  low  prices.    But  the 
with  its  allied  railroads  proved  the 
[877,  the  Pennsylvania  Railroad  aban- 
jld  the  Empire  Transportation  Company 
ipany.    The  Pennsylvania  Railroad  and 
ny  then  entered  into  a  contract  whereby 
ide  its  traffic  among  the  Pennsylvania, 
the  Erie,  and  the  Baltimore  and  Ohio, 
mittee  (New  York),  pp.  17s,  182. 
[oth  Cong.,  1st  Scss.,  vol.  g,  p.  176. 


and  in  return  was  to  receive  a  rebate  of  lo  per  cent  on  all  freight 
after  May  i,  1878  (when  the  contracts  of  the  Pennsylvania 
with  its  shippers  were  to  expire).^ 

In  the  same  year  (1877)  the  Standard  Qil  Company  acquired 
the  Columbia  Conduit  Company,  the  only  important  indepen- 
dent pipe-line  remaining  in  the  oil  regions.  By  the  close  of  the 
year,  therefore,  the  Standard  Oil  interests  had  obtained  control, 
through  stock  ownership,  of  substantially  all  the  pipe-lines  in  the 
oil  region.*  Hardly  a  barrel  of  oil  could  be  brought  to  the  rail- 
roads without  the  consent  of  the  Standard  organization.  Mr. 
Rockefeller  had  begun  with  an  ambition  to  be  the  only  oil 
refiner  in  the  country,  but  he  had  found  it  necessary  in  carrying 
out  this  purpose  to  secure  control  of  the  pipe-line  system.  The 
result,  incidentally,  was  the  acquisition  of  great  power  over  the 
railroads, — power  which  was  to  assist  in  the  maintenance  of  the 
monopoly  which  he  had  succeeded  in  building  up. 

The  independents,  however,  died  hard.  To  free  themselves 
from  the  dominance  of  the  Standard  Oil  Company,  they  organ- 
ized in  November,  1878,  the  Tide  Water  Pipe  Company  to  con- 
struct a  pipe-line  from  the  oil  fields  of  northwestern  Pennsylvania 
to  the  seaboard,  a  distance  of  109  miles.^  The  oil  was  to  be 
pumped  over  the  Alleghany  Mountains.  Up  to  this  time  oil  had 
never  been  pumped  more  than  30  miles,  and  no  considerable 
elevation  had  been  overcome.  The  project  was  deemed  quite 
impracticable  both  by  the  Standard  Oil  Company  and  by  the 
railroads.  Nevertheless,  success  crowned  the  venture.  In  June, 
1879,  oil  flowed  over  the  mountains,  and  into  the  receiving  tank 
located  on  the  eastern  side.  A  new  era  in  the  oil  business  seemed 
to  be  at  hand.  Clearly  it  was  but  a  matter  of  time  before  the 
Tide  Water  Pipe  Company  would  pump  oil  into  New  York  City, 
where  there  were  a  number  of  refiners  anxious  to  free  themselves 
of  their  dependence  on  the  Standard  Oil  Company  and  the  rail- 
roads.   To  meet  this  situation  the  Standard  Oil  Company  acted 

*  Montague,  The  Rise  and  Progress  of  the  Standard  Oil  Company,  pp. 


*  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  46. 

*  Tarbell,  The  History  of  the  Standard  Oil  Company,  vol.  11,  p.  4. 


with  its  usual  dispatch  and  skill.  The  local  pipeage  rate  was  re- 
duced by  the  Standard  pipe-lines;  and  thethrough  rate  on  crude 
oil  was  reduced  by  the  railroads,  in  order  to  prevent  this  traffic 
from  being  lost  to  them, — the  traffic  would  no  longer  bear  the 
former  rate.  The  railroad  rate  from  the  oil  fields  to  New  York 
Harbor,  for  example,  was  reduced  from  $1.15  per  barrel  to  30 
cents.*  The  Standard  Oil  Company  was  given  an  even  lower 
rate — 20  cents — ^but  in  spite  of  this  discrimination  in  its  favor  it 
remained  at  a  disadvantage.  According  to  an  estimate  of  the 
engineer  who  built  the  independent  pipe-line,  oil  could  be  piped 
to  seaboard  for  16  2/3  cents  per  barrel.^  Apparently  the  day 
of  the  railroad  as  a  long  distance  transporter  of  crude  oil  was 

The  Standard  Oil  interests,  however,  did  not  delay  action 
until  the  outcome  of  the  struggle  between  the  railroads  and  the 
long  distance  pipe-line  was  known.  Hardly  had  the  new  line  - 
proven  a  success,  when  the  Standard  interests  began  to  build 
pipe-lines  from  the  oil  fields  to  Bayonne,  New  Jersey,  to  Phila- 
delphia, and  to  the  inland  refining  points  at  Pittsburg,  Cleve- 
land, and  Buffalo.  To  cany  on  this  vast  program — destined  to 
make  the  Standard  Oil  Company  independent  of  the  railroads 
with  respect  to  the  transportation  of  crude  oil — the  National 
Transit  Company  was  incorporated  in  April,  1881,  with  a  capital  . 
of  $5,000,000.' 

Meanwhile,  the  Standard  Oil  Company  acquired  most  of  the 
independent  refineries  about  New  York  Harbor  which  the  Tide 
Water  Pipe  Company  proposed  to  feed.^  To  protect  themselves, 
the  supporters  of  the  Tide  Water  Pipe  Company  at  once  began  to 
build  several  refineries  on  the  seaboard,  the  oil  being  stored 
pending  their  completion.    Subsequently  the  Standard  Oil  Com- 

^  Report  of  the  Commissioner  of  Corporations  on  the  Transportation  of 
Petroleum,  p.  86.  Referred  to  hereafter  as  Report  on  Uie  Tran^x>rtation 
of  Petroleum. 

•Tarbell,  The  History  of  the  Standard  Oil  Company,  vol.  II,  p.  11. 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  53.  The  United  Pipe  Lines, 
a  system  of  local  gathering  lines,  was  transferred  to  the  National  Transit 
Company^ — the  trunk  line  system — in  1884. 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  53. 


pany  contrived  to  acquire  a  minority  of  the  company's  stock.  ^ 
This  action,  together  with  the  determined  (^position  of  the  rail- 
roads, led  to  a  practical  surrender  on  the  part  of  the  Tide  Water 
concern,  and  an  agreement  was  reached  in  October,  1883,  by 
which  the  Tide  Water  Company  became  for  all  practical  purposes 
a  part  of  the  Standard  Oil  System.*  The  Standard  Oil  Company 
and  its  ally  now  collected  practicaUy  all  the  crude  oil  produced, 
and  independent  enterprise  was  once  more  eflFectually  dis- 

By  1879,  as  we  have  seen,  the  Standard  Oil  Company  had  at- 
tained a  position  of  supremacy  in  the  refining  industry.  In  that 
year,  as  explained  in  chapter  III,  the  first  "trust  agreement" 
was  entered  into,  an  agreement  which  was  revised  and  elaborated 
in  1882.  Ten  years  later  (in  1892)  this  agreement  was  declared 
\/  illegal  by  the  Ohio  courts.  For  several  years  thereafter  a  com- 
munity of  interest  arrangement  was  relied  upon.  But  this  ar- 
1  rangement  was  likewise  attacked  in  the  Ohio  courts  as  not  repre- 
senting an  honest  attempt  to  comply  with  the  order  of  the  court, 
and  hence  in  1899  a  decision  was  made  to  reorganize  in  New 
[ersey  as  a  holding  company. 

Among  the  twenty  principal  companies  comprising  the  Stand- 
dard  Oil  organization  was  the  Standard  Oil  Company  of  New 
Jersey,  with  a  capital  of  $10,000,000.  The  charter  of  this  com- 
pany was  now  amended,  and  power  obtained  to  engage  in  all 
kinds  of  mining,  manufacturing,  and  trading,  and  to  hold  stocks 
and  bonds.  On  June  14,  1899,  the  capital  stock  of  the  Stand- 
ard Oil  Company  of  New  Jersey  was  increased  to  $110,000,000 
through  the  issuance  of  $100,000,000  of  common  stock,  the  ex- 
isting $10,000,000  being  changed  into  preferred  stock.^  The  New 
Jersey  concern  proceeded  to  exchange  its  stock  for  the  stocks  of 
the  concerns  which  had  formerly  been  controlled  by  the  trustees,^ 
but  which  now,  upon  the  tardy  liquidation  of  the  trust  certifi- 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  54.  ~^     ~" 
« Ibid. 
'  Ibid.,  p.  84. 

*  A  list  of  the  companies  controlled  by  the  Standard  Oil  Company  of  New 
Jersey  is  in  Report  on  the  Petroleum  Industry,  part  I,  pp.  85  seq. 


cates,  were  in  the  hands  of  the  former  holders  of  the  trust 
certificates.  Through  this  process  of  exchange  the  Standard  Oil 
Company  of  New  Jersey  within  a  short  period  of  time  had  out- 
standing all  told  about  $97,250,000  of  stock;  and  this  was 
practically  the  amount  of  "trust  certificates*'  issued  and  out- 
standing at  the  time  of  the  dissolution  in  1892.^  The  $10,000,000 
erf  preferred  stock  of  the  Standard  Oil  Company  of  New  Jersey — 
this  preferred  stock  represented  the  total  capital  stock  of  the 
Standard  Oil  Company  prior  to  the  increase  above  noted — ^was 
given  the  same  privileges  of  exchange  as  applied  to  the  stocks  of 
the  other  nineteen  constituent  companies,  and  it  was  readily 
exchanged  for  common  stock  in  the  Standard  Oil  Company  of 
New  Jersey,  since  under  this  company's  amended  charter  divi- 
dends on  the  preferred  stock  were  limited  to  6  per  cent,  whereas  it 
was  practically  certain  that  the  common  stock  would  receive 
much  higher  dividends.  The  preferred  stock,  after  this  ex- 
change, was  canceUed. 

This  reorganization,  however,  was  one  in  form  only.  The 
Standard  Oil  Company  of  New  Jersey  (a  holding  company) 
became  the  owner  of  the  stocks  previously  held  by  the 
trustees;  the  trustees  (liquidating)  were  made  directors  of  the 
holding  company;  and  the  holding  company  itself  was  controlled 
by  the  same  individuals  who  had  formerly  held  a  controlling 
interest  in  the  old  trust  certificates.^  The  trust  had  simply  hung 
out  a  new  sign. 

The  Standard  Oil  Company  of  New  Jersey  was  thus  princi- 
pally a  holding  company.  But  it  also  refined  and  marketed  oil 
on  its  own  account.  It  owned  the  large  refineries  at  Bayonne 
and  Constable  Hook,  New  Jersey,  and  it  operated  the  Standard 
refineries  at  Baltimore,  Maryland,  and  at  Parkersburg,  West 
Virginia.    The  refineries  directly  operated  by  the  Standard  Oil 

*  Report  on  the  Petrokum  Industry,  j)art  I,  p.  84.  There  was  no  watered 
stock  issued  as  the  result  of  the  reorganization  of  iSqq.  What  water  there 
was,  if  any,  resulted  from  the  issuance  of  the  trust  certificates  in  1882. 

*  Mr.  Rockefeller  himself  held  264  per  cent  of  the  stock  of  the  Standard 
Oil  Company  of  New  Jersey.    Report  on  the  Petroleum  Industry,  part  I, 

p.  95. 


Company  of  New  Jersey  produced  in  1904  approximately  one- 
third  of  all  the  illuminating  oil  produced  by  the  Standard 

The  history  of  the  Standard  Oil  Ccwnpany  and  the  forms  erf 
organization  adopted  by  it  have  been  briefly  outlined.  It  is  now 
proposed  to  consider  in  more  detail  the  position  attained  by  the 
Standard  Oil  Company,  and  the  principal  factors  in  its  success. 
The  treatment  will  deal  in  the  main  with  the  period  from  1904  to 
1906,  the  years  which  served  as  the  basis  for  the  reports  of  the 
Commissioner  of  Corporations. 

In  1904  illuminating  oil,  or  kerosene,  was  the  most  important 
product  derived  from  crude  oil,  both  in  quantity  and  value. 
According  to  the  United  States  Census  the  total  production  of 
refined  oil  *  in  1904  was  27,135,094  barrels,  or  1,356,754,700  gal- 
lons. Of  this  amount  the  Standard  Oil  Company  produced  at 
plants  controUed  directly  by  it,  21,341,179  barrels,  or  78.65  per 
cent  of  the  total.^  The  other  refineries  affiliated  with  it  produced 
about  2,143,100  barrels,  which,  added  to  the  Standard  Oil  output 
of  21,341,179  barrels,  made  a  total  of  23,484,279  barrels,  or 
86.55  per  cent  of  the  country's  output.^  This  left  3,650,805  bar- 
rels as  the  output  of  the  remaining  concerns,  or  13.45  per  cent 
of  the  total.  But  not  all  of  this  remainder  could  properly  be 
considered  as  independent.  Some  of  the  so-called  independent 
refiners  were  unable  to  obtain  crude  oil  except  from  the  Standard 
itself.  The  Standard,  of  course,  allowed  them  only  as  much 
crude  oil  as  it  chose,  and  in  this  way  was  able  to  prevent  them 
from  extending  their  business,  and  from  becoming  really  ef- 
fective competitors.  It  appears  that  of  the  total  of  about 
3,650,000  barrels  of  refined  oil  produced  by  the  companies  not 
affiliated  with  the  Standard  Oil  Company,  some  1,160,000,  or 
nearly  one-third,  were  produced  in  refineries  dependent  for 

*  In  customary  usage  the  term  "refined  oil"  refers  to  illuminating  oil  only, 
and  it  is  so  used  in  the  Report  of  the  Commissioner  of  Corporations. 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  265. 

*  Brief  for  the  United  States  (no.  725),  w>l.  I,  p.  144,  places  the  percentage 
at  87.30,  and  states  that  an  employee  of  the  Standard  Oil  Company  verified 
the  correctness  of  the  computation. 


their  crude  oil  mainly  or  entirely  on  the  Standard  companies.* 
While  these  1,160,000  barrels  might  not  properly  be  treated  as 
controlled  by  the  Standard,  neither  could  they  be  denominated 
really  independent,  in  view  of  the  conditions  under  which 
these  companies  secured  their  crude  oil.  If  we  deduct  these 
1,160,000  barrels,  there  would  be  left  as  ind^jendfi^t  approxi- 
mately 2,500,000  barrels,  or  only  a  Uttle  over  9  per  cent  of 
the  total  production. 

The  effectiveness  of  the  competition  of  the  independents 
was  even  less  than  these  figures  would  indicate,  since  their 
total  production  was  distributed  among  a  large  number  of 
concerns.  In  1904  there  were  some  seventy-five  independent 
refiners  all  told.*  The  total  output  of  these  companies  was 
less  than  that  of  either  the  Bayonne  or  the  Philadelphia  works 
of  the  Standard  Oil  Company.  Had  the  tntil  indrprndfint  mit 
put  been  concentrated  in  a  few  1?trgp  ^ffinpqg|;^  competition  with 
thfr&t&ndard  Oil  Coitipany  wQUJri  ^^^"^  ^^n  itjV'^h  ^'^^^  vigor- 
ous an<Ksuccessful. 

Lhe  afor^entioned  statistics  relate  to  the  production  of  re- 
fined oil  in  the  United  States,  not  to  the  consumption  within 
the  United  States.  But  they  also  fairly  indicate  the  Standard's 
proportion  of  the  sales  in  this  country,  in  spite  of  the  fact  that 
some  ss  per  cent  of  the  country's  output  was  then  exported,  be- 
cause the  Standard  Oil  Company's  proportion  of  the  export  bus- 
iness was  only  a  little  greater  than  its  proportion  of  the  domestic 
production.  According  to  the  report  of  the  Bureau  of  Corpora- 
tions the  Standard's  proportion  of  domestic  sales  in  1904  was  in 
the  neighborhood  of  85  per  cent.^ 

Next  in  importance  to  iUuminating  oil  among  the  products 
of  crude  petroleum  were  the  naphthas  (gasoline  and  benzine) 
and  the  lubricating  oils.  But  no  statistics  were  available  show- 
ing the  quantity  of  these  products  refined  by  the  Standard 
Oil  Company.  The  Commissioner  concluded,  however,  that 
because  of  the  ph)rsical  limitations  on  varying  the  proportion 

'  Report  on  the  Petroleum  Industry,  part  I,  p.  281. 

*  Ibid.,pp.  271-273. 

*  Ibid.,  p.  284. 


of  the  different  refined  products  derived  from  crude  oil,  it  was 
safe  to  say  that  the  Standard  controlled  in  1904  at  least  four- 
fifths  of  the  country's  output  of  naphtha  and  lubricating  oil.* 

That  the  Standard  Oil  Company  possessed  monopolistic 
power  is  evident.  What  were  the  chief  sources  of  that  power? 
The  ability  of  the  Standard  to  maintain  a  monopolistic  position 
was  not  the  result  of  the  exclusive  ownership  of  a  limited  nat- 
ural resource;  the  Standard  had  no  monopoly  of  the  produc- 
tion of  crude  oil,  the  raw  material.  Though  the  company  pro- 
duced large  quantities  of  crude  oil,  it  produced  but  a  small 
proportion  of  its  own  requirements.  The  total  production  of 
crude  oil  in  the  United  States  in  1905  was  approximately  135 
million  barrels,  and  of  this  amount  not  over  one-sixth  was  the 
product  of  wells  owned  by  the  Standard  Oil  Company  or  af- 
filiated concerns.^  Its  interest  in  crude  oil  production  seems 
to  have  been  greatest  in  the  Pennsylvania  and  Lima  oil  fields. 
In  1906  Standard  Oil  interests  produced  26  per  cent  of  the 
crude  oil  output  of  the  Pennsylvania  field,  and  31  per  cent  of 
the  output  of  the  Lima  field.'  In  other  fields,  however,  such  as 
the  Mid-Continent,  California,  Colorado,  and  Gulf,  its  produc- 
tion wa3  quite  small.^ 

There  were  at  least  two  reasons  why  the  Standard  Oil  Company 
did  not  attempt  to  monopolize  the  refining  industry  by  means  of 
the  ownership  of  the  supply  of  raw  material.  In  the  first  place, 
the  Standard  probably  obtained  its  oil  cheaper  by  buying  a 
large  part  of  it  than  it  could  have  obtained  it  by  producing  the 
entire  supply  itself.  The  highly  speculative  character  of  the  oil 
business,  like  gold  mining,  probably  caused  crude  oil  to  be  sold 
on  the  average  for  less  than  the  cost  of  production,  at  least 
during  considerable  periods  of  time.  The  Standard  therefore 
allowed  others  to  take  the  risks  of  prospecting,  and  of  opening 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  282.  In  the  brief 
for  the  government  it  was  charged  that  the  Standard  with  its  affiliated 
companies  manxifactured  in  1904,  82.9  per  cent  of  the  naphtha  produced  in 
the  United  States.    Brief  for  the  United  States  (no.  725),  vol.  I,  p.  144. 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  8. 

*  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  139. 

*  Report  on  the  Petroleum  Industry,  part  I,  pp.  1 18-1 19. 


up  new  fields,  and  confined  its  efforts  in  the  line  of  crude  oil 
production  to  the  better  developed  areas.  Secondly,  and  prob- 
ably more  important,  the  Standard  was  able  to  secure  control 
of  the  crude  oil  supply  without  producing  it  itself.  The  owner- 
ship  by  the  Standard  of  the  pipe-lines,  the  only  effective  means 
"gfinarfceting  most  of  the  oO^  gave  it  just  as  complete  control  of 
the  supply  of  crude  oil  as  if  it  had  held  title  to  the  oil  fields. 
Because  of  its  control  of  the  pipe-lines,  the  Standard  in  many 
districts  was  almost  the  sole  purchaser  of  crude  oil,  and  this 
practicaUy  enabled  it  to  fix  the  price.  In  the  Pennsylvania, 
.Lima-Indiana,  and  Mid-Continent  fields — the  principal  fields 
producing  oil  suitable  for  refining — the  Standard  Oil  Company 
daily  published  the  price  that  it  would  pay  for  crude  oil,  and  this 
price  was  the  public  market  price.  Prior  to  1895  oil  had  been 
bought  and  sold  at  oil  exchanges  located  in  New  York,  Pitts- 
burg, and  Oil  City,  Pennsylvania.  But  these  exchanges  were 
discontinued  in  1895  on  account  of  an  announcement  by  the  ,^'  \ 

Standard  that  it  would  no  longer  purchase  oil  on  the  basis  of      .  \i^* 
the  prices  established  on  the  exchanges;  and  thereafter  the   vX 
Standard  itself  named  the  price.^  a  , 

It  has  been  urged  on  behalf  of  the  Standard  Oil  Company 
that  its  monopoly  power  was  due  to  the  great  ability  of  its 
managers,  and  the  consequent  efficiency  of  its  plants  and  or- 
ganization.   That  jhe  qopipany  all  through  its  history  has  been 

^y  ffffirjpnt  is  nuestjoned  by  no  one.  And  yet  the  Standard 
Ofl  Company  has  had  no  monopoly  of  business  ability;  it  has 
been  ability  of  the  same  high  order  that  developed  our  railroads, 
our  mineral  resources,  our  timber  lands,  and  our  industries  gen- 
erally. The  "captain  of  industry"  has  been  conspicuous  in  all 
lines  of  business.  The  Standj^rd  Oil  officials  may  have  been 
"smarter"  than  their  Mlnw^^g  Mr.  W.  H.  Vanderbilt  once 
said,  but,  as  will  be  pointed  out  later,  it  was  not  their  ability 
alone  that  enabled  the  Standard  to  develop  and  maintain  its 

But  if  the  Standard's  monopoly  power  may  not  be  ascribed 
primarily  to  the  efficiency  of  its  managers,  may  it  not  be  the 
^  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  165. 


result  of  the  ecoiKiinies  of  the  trust  fonn  of  organization?  Did 
the  establishment  ct  a  trust  make  it  possible  for  the  Standard  to 
produce  more  cheaply  than  its  competitors,  combined  thou^ 
some  (d  them  were,  and  was  the  Standard  able  to  retain  its  mo- 
nc^ly  by  the  practice  of  maintaining  such  a  low  level  of  prices 
the  country  over  that  competition  was  mpossible?  This  is  a 
matter  that  deserves  more  detailed  analysis  than  has  yet  been 
given  to  it  by  any  governmental  investigating  body,  even  includ- 
ing the  Bureau  of  Corporations.  Needless  to  say,  it  is  not 
within  the  power  of  the  individual  investigator  to  secure  the  de- 
sired data.  However,  we  are  not  altogether  in  the  dark  iqxm  the 
question  at  issue,  since  the  Bureau  did  make  quite  an  extended 
investigation  into  the  relative  costs  of  refining  at  the  Standard- 
and  at  the  independent  plants. 

Whatever  superiority  the  Standard  Oil  Company  possessed 
over  the  independents  in  the  refining  business  must  be  attributed, 
said  the  Bureau,  chiefly  to  one  of  two  causes:  (i)  the  possession 
of  a  considerable  number  of  plants;  (2)  the  large  size  of  its  plants. 

(i)  The  Standard  Oil  Company  with  plants  scattered  all  over 
the  country  was  able  to  reduce  transportation  charges,  i.  e.,  to 
eliminate  cross  freights.  It  could  supply  each  section  of  the 
country  from  its  nearest  plant,  and  thus  effect  a  saving  as  com- 
pared with  the  refiner  who  had  to  distribute  from  a  single  re- 
finery.^ The  Standard  Oil  Company  inigod  owned  or  controlled 
the  output  of  over  twenty  refineries  located  in  twelve  states, 
scattered  from  New  York  Harbor  to  San  Francisco  Bay,  and  from 
the  Great  Lakes  to  the  Gulf  of  Mexico.  No  independent  refiner, 
however,  had  more  than  three  refineries,  and  only  two  or  three 
had  more  than  one.^  The  Standard  refineries,  moreover,  were  as 
a  rule  much  nearer  the  large  consuming  centers. 

The  possession  of  a  number  of  refineries  doubtless  conferred 
an  additional  advantage  through  the  possibility  which  thus 
arose  of  comparing  the  results  at  different  plants,  and  of  carry- 
ing on  experiments  in  individual  plants  without  involving  the 

*  From  this  it  follows,  of  course,  that  the  refiner  with  a  single  plant  had 
only  A  limited  market. 

•  Report  on  the  Transportation  of  Petroleum,  p.  29. 



entire  volume  of  business.  There  may  also  have  been  the  pos- 
sibility of  reducing  the  cost  of  general  administration  and  of 
siq>erintendence.  However,  the  economies  directly  attributable 
to  the  possession  of  numerous  refineries,  aside  from  the  saving  in 
cost  of  transportation,  were,  in  the  opinion  of  the  Commissioner 
f  Corporations,  by  no  means  great.^ 

(2)  The  Stapdard  also  had  an  advantage  over  the  independ- 
ents because  of  the  large  size  of  its  individual  plants.  In  the 
eighteen  plants  directly  controUed  by  it  the  Standard  produced, 
in  1904,  21,341,000  barrels  of  illuminating  oil,  while  the  75  or 
more  independent  plants  in  the  country  had  an  output  of  only 
*  about  3 ,650,000  barrels.  The  Standard  plants  at  Bayonne  and  at 
Philadelphia  each  produced  approximately  5,000,000  barrels,  or 
about  50  per  cent  more  than  all  the  independent  plants  put  to- 
gether. The  largest  independent  concern  in  1904  produced  only 
about  200,000  barrels  of  illuminating  oil.  After  1904  several 
independent  concerns  enlarged  their  refineries,  or  constructed  new 
ones  which  approximated  the  average  size  of  the  Standard  plants, 
yet  none  of  the  independent  plants  could  compare  in  size  with 
the  largest  Standard  plants. 

The  superiority  of  the  large  Standard  plants,  however,  was  by 
no  means  as  pronounced,  said  the  Bureau  of  Corporations,  as  the 
representatives  of  the  company  claimed.  This  superiority  would 
be  expected  to  manifest  itself  in  two  different  ways — ^first,  in  a 
lower  cost  per  unit  of  product;  and,  second,  in  better  yields,  i.  e., 
a  less  amount  of  waste  and  larger  proportions  of  the  more  val- 
uable products.  With  regard  to  the  first  point,  the  Bureau 
declared  that  there  was  no  great  difference  in  refining  costs  as 
between  the  plants  of  the  independents  and  the  plants  of  the 
Standard.  Data  gathered  by  the  Bureau  from  nine  independent 
refineries  (the  only  ones  whose  costs  were  closely  comparable 
with  those  of  the  Standard  refineries)  showed  operating  costs  of 
refining  ranging  from  24.91  cents  per  barrel  of  crude  to  35.53 
cents,  and  averaging  29.28  cents.^  Data  regarding  the  Standard 
Oil  Company's  refining  costs  were  collected  for  the  following  six 

>  Rqxut  on  the  Petroleum  Industry,  part  II,  p.  650. 
•  Ibid.,  p.  653. 


plants:  Sugar  Creek,  Missouri,  and  Neodesha,  Kansas  (com- 
bined), 15.46  cents  per  barrel;  Chaison,  Texas  (Security  Oil 
Company,  an  affiliated  concern),  27.0  cents;  Lima,  Ohio,  29.29 
cents;  Richmond,  California,  32.8  cents;  Florence,  Colorado 
(United  Oil  Company,  which  seUs  its  whole  output  to  the 
Standard),  33.6  cents.*  From  an  examination  of  the  costs 
at  these  six  plants  it  appears  that,  with  the  exception 
of  the  Sugar  Creek  and  Neodesha  refineries,  the  operat- 
ing expenses  of  the  Standard  plants  were  approximately 
the  same  as  those  of  the  independents  for  which  data 
were  available;  and  the  Sugar  Creek  and  Neodesha  plants 
may  not  properly  be  compared  with  these  independent  plants, 
since  they  did  not  elaborate  by-products.^  The  Lima  plant  of 
the  Standard  was  found  to  be  most  nearly  comparable  to  the 
independent  plants  whose  costs  had  been  secured,  since  it 
carried  the  elaboration  of  by-products  to  practically  the  same 
degree  of  completeness.  The  operating  costs  of  the  Lima  plant 
were,  in  fact,  almost  exactly  the  same  as  the  average  for  the  nine 
independent  plants — 29.29  cents  as  compared  with  29.28  cents. 
It  is  possible,  said  the  Bureau,  that  some  of  the  larger  Standard 
refineries  had  slightly  lower  costs,  but  in  any  event  the  difference 
between  the  average  operating  cost  for  all  the  Standard  refiner- 
ies and  for  the  more  efficient  independent  refineries  did  not,  at 
the  most,  exceed  one-eighth  of  a  cent  per  gallon.' 

With  respect  to  the  yield  of  products,  satisfactory  statistical 
data  were  not  available.  It  was  known  that  some  of  the  Stand- 
ard plants  elaborated  their  by-products  more  fully  than  any 
independent  plant,  and  also  that  the  Standard  plants  on  the 
whole  secured  more  of  the  high  grade  by-products.  But  it  is  not 
probable,  the  Commissioner  maintained,  that  there  was  a  very 
great  difference  in  efficiency  with  respect  to  yields  as  between  the 
best  Standard  plants  and  the  best  independent  plants.^ 

*  Report  on  the  Petroleum  Industry,  pwirt  II,  pp.  653-654.  The  Bureau 
did  not  secure  any  direct  information  as  to  the  costs  of  production  at  the 
Standard's  plant  in  Whiting. 

'  Report  on  the  Petroleum  Industry,  part  II,  p.  654. 

*  Ibid.,  p.  655.  <  Ibid.,  p.  651. 


Taking  into  account  both  the  cost  of  refining  per  unit  and  the 
yield,  it  is  probably  safe  to  say,  stated  the  Conunissioner,  that 
the  advantage  of  the  Standard  over  the  independent  plants  was 
not  more  than  one^fourth  of  a  cent  per  gallon  in  the  cost  of  fin- 
ished products,  and  at  the  outside  it  would  not  exceed  one-half 
of  a  cent  per  gallon.^ 

To  what  1^  tj^  af^Agtntage  of  the  Standard  due?  Did  it 
represent  the  economies  of  the  trust  form  of  organization,  or  did 
>ult  from  the  fact  that  the  largest  plants  were  owned  by  the 
trijst?  To  put  it  differently,  was  the  standard's  low  refining  cost 
the  result  of  combination  or  of  large-scale  production?  Upon 
this  point  the  report  of  the  Bureau  returned  no  conclusive  an- 
swer, since  the  costs  at  the  large  Standard  plants  were  not  shown. 

It  is  clear  from  what  has  been  said  that  the  Standard,  in  part 
because  of  the  volume  of  its  business,  and  the  consequent  greater 
size  of  its  plants,  did  refine  somewhat  more  cheaply  than  its 
competitors.^   Yet  the  Standard  would  have  effected  a  monopoly 
through  low  production  costs  only  if  it  had  been  willing  to  charge 
prices  generally  so  low  that  the  independents  could  not  produce 
at  a  profit.    But  this  was  not  its  policy.    The  Standard,  to 
be  sure,  did  cut  prices  in  certain  localities  to  make  it  uncom- 
fortable for  its  competitors,  but  this  is  quite  different  from  a 
policy  of  low  prices  generally — a  policy  that  would  have  cut  in 
severely  on  the  Standard's  profits.     And  the  fact  that  the 
Standard  was  able  to  maintain  its  control  of  the  industry  while 
at  the  same  time  charging  prices  so  high  that  many  of  the  in- 
dependents made  ample  profits,  in  spite  of  the  difficulties  under 
which  they  labored,  must  mean  that  the  Standard  resorted  to 
other  methods  of  restraining  competition.    Beyond  question,  1 
says  the  Commissioner  of  Corix)rations,  the  dominant  position f\ 
of  the  Standard  Oil  Company  in  the  refining  industry  was  due    I 
to  unfair  practices — to  abuse  of  the  control  of  pipe-lines,  to  rail-  A 
road  discriminations,  and  to  imfair  methods  of  competition 

*  RqM>rt  on  the  Petroleum  Industry,  part  II,  p.  655. 

•  The  Standard  had  a  further  advantage  over  its  competitors  through  the 
ownership  of  pipe-lines,  but,  as  will  be  shown  later,  this  did  not  constitute  a 
legitimate  advantage. 


in  the  sale  of  the  refined  petroleum  products.^   These  practices 
will  therefore  be  considered  in  some  detail. 

Throughout  its  entire  history  the  foundation  of  the  Standard 
Oil  Company's  success  has  been  the  element  of  transportation. 
The  advantages  in  transportation  possessed  by  the  Standard 
have  been  two-fold:  those  resulting  from  its  ownership  of  pipe- 
lines for  transporting  crude  oil;  and  those  resulting  from  rail- 
road discriminations  in  the  transportation  of  the  refined  products 
of  crude  oil. 

Ownership  of  Pipe-Lines 

Most  of  the  crude  oil  produced  in  this  country,  with  the  ex- 
ception of  that  produced  in  California,  Texas,  and  Louisiana,  is 
refined  before  being  consumed.^  It  reaches  the  refineries  mainly 
by  means  of  pipe-lines.  A  net  work  of  small  pipes  gathers  the 
oil  from  the  wells,  and  except  where  the  refinery  is  quite  near 
to  the  wells,  the  oil  is  conveyed  to  the  refining  point  by  means 
of  trunk  lines,  often  of  great  length.  The  process  by  which  the 
Standard  interests  acquired  a  practical  monopoly  of  the  pipe- 
line system  has  already  been  described.  This  monopoly  it  was 
able  to  maintain.  In  1904  the  Standard  controlled  88.7  per  cent 
of  the  pipe-line  business  of  the  Pennsylvania  field,  and  93.5 
per  cent  of  that  of  the  Lima-Indiana  field.^  There  were 
apparently  no  competing  lines  whatever  in  the  Illinois  field, 
and  up  to  1906  there  was  substantially  no  competition  in  the 
Mid-Continent  field.* 

The  methods  employed  by  the  Standard  to  maintain  its 
monopoly  of  the  pipe-line  business  were  thoroughly  investi- 
gated by  the  Bureau  of  Corporations.  The  conclusions  of  the 
Bureau  were  substantially  as  follows:  ^ 

(i)  The  Standard  interfered  with  the  construction  of  inde- 

^  Report  on  the  Petroleum  Industry,  part  I,  pp.  276-277. 

*  The  oil  of  these  states  is  not  so  suitable  for  refining,  and  is  used  laigdy 
for  fuel  in  its  natural  condition. 

*  Brief  for  the  United  States  (no.  725),  vol.  I,  pp.  140-141. 

*  Ibid.,  pp.  141-142. 

.  •  Report  on  the  Petroleum  Industry,  part  I,  pp.  153-154. 


pendent  pipe-lines  in  various  ways.  Having  once  constructed 
its  own  line,  it  used  its  influence  to  prevent  th^  passage  of  laws 
giving  pipe-lines  the  right  of  eminent  domain."*  In  the  absence 
of  such  laws,  and  to  some  extent  even  when  they  existed,  it  was 
able  to  hinder  or  prevent  the  construction  of  independent  pipe- 
lines by  buying  up  or  securing  control  of  lands  over  which  they 
had  to  pass,  and  by  influencing  railroads  to  refuse  pipe-lines  the 
right  to  cross  their  tracks.  (2)  When  the  Standard  was  unable 
to  preyent  the  construction  of  independent  pipe-lines  it  sought 
to  control  them  by  acquiring  their  stock.  (3)  The  Standard 
at  times  induced  crude  oil  producers  who  were  relied  upon  to 
furnish  oil  to  independent  pipe-lines,  or  refiners  who  were  relied 
upon  to  take  the  oil,  to  refrain  from  doing  so.  This  policy  was 
frequently  accompanied  by  outright  purchase  of  the  crude-oil 
prc^rties  or  refineries.  By  this  means  the  volume  of  business 
of  the  independent  lines  was  restricted,  and  the  cost  of  pipeage 
prc^rtionally  increased.  (4)  The  Standard  by  the  payment  of 
premiums  for  crude  oil  produced  in  the  territory  reached  by  the 
independent  pipe-lines  made  it  difficult  for  independent  pipe 
companies  to  obtain  oil  for  transportation  over  their  lines.  Most 
of  the  independent  pipe  companies,  like  the  Standard  itself, 
purchased  practically  all  the  crude  oil  which  they  handled. 
The  payment  of  a  premium  meant  that  a  higher  price  was 
offered  for  the  crude  of  a  particular  area  than  was  offered  for 
crude  elsewhere  in  this  same  field.  By  paying  a  premiimi  the 
Standard  was  able  to  prevent  the  independent  pipe-lines  from 
getting  an  adequate  supply  of  oil,  or  else  to  force  them  also  to 
pay  premiums,  with  a  consequent  diminution  in  their  profits. 
Since  the  independent  pipe-lines  were  all  comparatively  small 
concerns,  reaching  only  a  limited  area,  the  Standard  by  paying 
these  premiums  in  certain  localities  greatly  reduced  their 
profits,  while  itself  sustaining  comparatively  little  loss  on  the 
entire  volume  of  its  business.  The  practice  of  paying  premiums 
on  crude  oil  is  similar  in  principle  and  effect  to  the  practice  of 
selling  refined  products  at  a  cut  price  in  certain  markets  (local 
price  discrimination).  The  payment  of  premiums  was,  on  the 
whole,  the  most  important  of  the  unfair  practices  of  the  Stand- 


ard  in  preventing  the  development  of  competition  in  the  pipe- 
line business. 

The  practices  above  enumerated  by  ^he  Commissioner  re- 
sulted in  legislation  dealing  with  the  situation.  In  1906  pipe- 
lines were  declared  by  the  Hepburn  Act  to  Be  common  carriers. 
This  made  them  subject  to  the  provisions  of  the  law  requiring  the 
charging  of  reasonable  and  non-discriminatory  rates,  and  the  filing 
of  these  rates  with  the  Interstate  Commerce  Commission.  The 
constitutionality  of  this  law,  however,  was  disputed,  and  mean- 
while the  pipe-line  companies  controlled  by  the  Standard  ren- 
dered the  law  practically  inoperative,  according  to  the  Commis- 
sioner of  Corix)rations,  by  their  refusal  to  accept  the  obligations 
of  conunon  carriers.^  The  companies  endeavored  in  various 
ways  to  prevent  outside  shippers  from  making  an  effective  use 
of  the  Standard  pipe-lines.  We  quote  again  substantially  from 
the  report  of  the  Bureau.^  (i)  Some  of  the  Standard  pipe-lines 
filed  no  tariffs  with  the  Conmiission,  and  refused  to  transport 
any  oil  for  others.  To  avoid  doing  so  they  sought  in  some  cases 
to  confine  their  business,  or  at  least  pretended  to  confine  it, 
within  the  boundaries  of  individual  states.  (2)  Though  some  of 
the  Standard's  pipe-lines  filed  their  rates  with  the  Commission, 
the  rates  specified  were  almost  identical  with  the  rates  of  the 
railroads  between  these  same  points.  The  rates  charged,  fur- 
thermore, were  much  in  excess  of  the  cost  of  the  service,  and 
were  thus  imreasonable.'  (3)  The  tariffs  filed  by  those  Standard 
pipe-lines  that  did  comply  with  the  law  in  this  respect  were  more 
remarkable  for  their  omissions  than  for  the  rates  which  they 
quoted.  For  example,  no  rates  were  given  to  New  York  Harbor, 
either  in  the  state  of  New  York  or  in  the  state  of  New  Jersey, 
and  no  rates  to  Baltimore,  Maryland.  These  were  points  to 
which  outside  shippers  would  very  naturally  wish  to  send 
oil.    On  the  other  hand,  numerous  rates  were  quoted  to  places 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  183. 

*  Ibid.,  pp.  1 83-191. 

•Ibid.,  pp.  35-36.  On  the  wide  margin  between  pipe-line  costs  and 
rates,  see  also  the  Report  of  the  Federal  Trade  Commission  on  Pipe-Line 
Transportation  of  Petroleum,  pp.  18-20. 


where  no  one  would  care  to  deliver  oil.  (4)  Finally,  even  when 
the  Standard  pipe-lines  did  file  tariffs  indicating  an  apparent 
willingness  to  transport  oil  for  others,  they  established  regu- 
lations that  virtually  prevented  shipments.  Most  of  the 
tariffs  filed  by  the  Standard  required  shipment  to  be  made  in 
quantities  of  not  less  than  75,000  barrels,  and  in  the  case  of 
same  of  the  lines,  300,000  barrels,  minima  so  high  as  virtually  to 
prevent  the  use  of  the  pipe-lines  by  outside  shippers. 

While  such  tactics  as  these  did  not  indicate  a  disposition  to 
ccwnply  with  the  requirements  of  the  law,  the  Conmiis- 
sioner  pointed  out  that  possibly  the  action  of  the  Standard 
pipe-line  companies  did  not  represent  their  finally  deter- 
mined policy.  The  act  had  just  been  passed,  and  the  Inter- 
state Commerce  Conmiission  had  not  yet  made  any  regulations 
with  respect  to  pipe-lines,  or  decided  any  cases  involving  their 
rates.  But  the  report  of  the  Federal  Trade  Commission  on  Pipe- 
Line  Transportation  of  Petroleum  makes  it  clear  that  obstruc- 
tionary  tactics  were  to  be  the  Standard's  determined  poUcy  ;^  that 
the  law  was  not  to  be  obeyed  until  its  constitutionality  had  been 
decided  by  the  Supreme  Court.  And  this  did  not  come  to 
pass  until  1914.  Several  years  after  the  passage  of  the  Hepburn 
Act  in  1906,  the  Interstate  Commerce  Commission  had  issued  an 
order  requiring  the  Standard  and  other  pipe-line  companies  to 
file  with  the  Commission  schedules  of  their  charges  for  the 
tran^x>rtation  of  oil.*  The  defendants  brought  suit  in  the 
CcMnmerce  Court  to  set  aside  the  order,  and  that  court  issued  a 
preliminary  injunction,  holding  the  statute  to  be  unconstitu- 
tional.' But  in  1914  in  the  Pipe-Line  Cases  the  Supreme  Court 
fully  upheld  the  constitutionality  of  the  law.*  The  interstate 
pipe-lines  thereupon  filed  their  rates  with  the  Commission,  but 
they  had  succeeded  in  staying  the  operation  of  the  law,  so  far  as 
they  were  concerned,  for  a  period  of  eight  years. 

The  excessive  pipe-line  rates  charged  the  independent  refiners 
were  likewise  charged  the  Standard  refining  companies.  But 
this  clearly  was  a  matter  of  indifference  to  the  Standard  organi- 

'  Sec  pp.  aa-22.  •  204  Fed.  Rep.  798. 

*  24  I.  C.  C.  Reports  i-ii  (June  3,  191 2).  *  234  U.  S.  548. 


zation.  It  was  simply  a  question  of  where  the  profit  of  the 
organization  as  a  whole  was  mainly  to  be  made,  whether 
in  transportation  or  in  refining.  To  the  independent  refiner, 
however,  a  high  pipage  rate  was  a  vital  matter.  An  unreason- 
able rate  reduced  corresf)ondingly  his  total  profits,  and  might 
cause  him  to  do  business  at  a  loss.  At  times  the  rate  on  crude 
oil  from  the  Appalachian  field  to  the  seaboard  was  more  than 
25  cents  per  barrel  higher  than  the  cost  of  transportation, 
including  in  that  cost  a  profit  of  10  per  cent  on  the  cost  of  repro- 
ducing the  pipe-lines.^  This  was  over  half  a  cent  per  gallon,  and 
half  a  cent  would  yield  a  profit  of  about  10  per  cent  on  the  invest- 
ment required  to  carry  on  the  refining  business.*  It  is  dear  that 
the  opportunities  for  competition  in  the  refining  of  oil  would 
have  been  much  greater  had  the  Standard  pipe-lines  been  com- 
pelled to  carry  oil  for  others  at  a  reasonable  rate.  In  fact,  not 
only  the  prosperity,  but,  according  to  the  Federal  Trade  Com- 
mission, perhaps  even  the  existence  of  many  small  concerns  was 
dependent  on  lower  pipe-line  rates  and  reasonable  minimum 

The  control  of  the  pipe-lines  with  the  refusal  to  charge  reason- 
able rates  on  the  transportation  of  crude  oil  gave  the  Standard  a 
further  advantage  over  the  independents,  in  that  it  was  enabled 
to  locate  its  refineries  more  advantageously  than  the  independ- 
ents. Thus,  the  Standard  refineries  were  located  for  the  most 
part  near  the  centers  of  consumption,  its  two  largest  refineries 
being  on  the  Atlantic  seaboard,  and  its  third  largest  being  at 
Whiting,  Indiana  (near  Chicago).  It  was  the  low  cost  of  trans- 
porting crude  oil  by  pipe-line  that  made  it  possible  for  the  Stand- 
dard  Oil  Company  to  locate  its  refineries  so  far  from  the  oil  wells. 
'  On  the  other  hand,  the  high  rates  charged  on  oil  transported 
through  the  pipe-lines  forced  the  refiners  not  possessing  pipe- 
lines to  locate  their  refineries  near  the  supply  of  raw  material,  and 
to  distribute  their  refined  products  from  such  points.  Thus, 
the  main  centers  of  independent  oil  refining  in  1906  were  in  west- 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  38. 
» Ibid. 

•  Report  on  Pipe-Line  Transportation  of  Petroleum,  p.  XXXH. 


em  and  northwestern  Pennsylvania,  and  northwestern  Ohio. 
There  were  only  four  independent  plants  on  the  Atlantic  coast, 
near  to  the  populous  cities  of  the  seaboard  and  to  the  export 
markets;  and  none  at  Whiting,  the  distributing  point  for  the 
western  and  southern  markets. 

The  advantage  in  locating  near  the  market  obviously  arose  out 
of  the  fact  that  the  cost  of  transf)orting  crude  oil  in  pipe-lines  was 
much  less  than  the  cost  of  transporting  the  refined  product  to 
market  by  rail  or  water.  Whereas  the  entire  cost  of  transporting 
crude  oil  by  pipe-line  from  the  Appalachian  field  to  the  Atlantic 
seaboard  did  not  exceed  one-fourth  of  a  cent  per  gallon,  the 
freight  rate  on  refined  oil  from  the  independent  plants  in  west- 
em  Pennsylvania  to  New  York  Harbor  was  about  one  cent  per 
gallon.^  Naturally  the  independent  refiners  preferred  to  locate 
their  plants  on  the  seaboard,  rather  than  near  the  oil  fields,  yet 
this  was  not  practicable,  since,  as  has  been  stated,  the  Standard 
pipe-lines  charged  prohibitive  rates  for  the  transportation  of 
crude  oil,  the  pipeage  rates  to  independent  shippers  being  several 
times  the  actual  cost  of  transportation  to  the  Standard  pipe- 
lines. The  independents  might  still  have  located  near  the 
centers  of  consumption  had  the  rail  rates  on  the  transportation 
of  crude  oil  been  comparatively  low,  but  this  was  not  the  case. 
Generally  speaking,  the  rail  rates  were  as  high  or  even  higher 
than  the  pipe-line  rates,  high  as  these  were.^ 

It  might  be  asked  why  the  independent  refiners  did  not  build 
pipe-lines  of  their  own,  if  the  location  of  their  refineries  near  the 
markets  was  prevented  by  the  excessive  rates  charged  by  the 
Standard  pipe-lines.  The  explanation  is  that  pipe-line  trans- 
portation for  long  distances  is  economical  only  when  the  volume 
of  traffic  is  large;  and  the  unfair  methods  of  the  Standard  had 
prevented  the  independents,  with  a  few  notable  exceptions, 
from  building  up  a  business  sufficient  to  justify  the  investment. 
The  United  States  Pipe  Lme  Company  did  succeed  in  constmct- 
ing  a  tmnk  pipe-line,  but  because  of  the  opposition  of  both  the 

*  Rqx)rt  on  the  Transportation  of  Petroleum,  p.  62. 

*  Report  of  the  Federal  Trade  Commission  on  Pipe-Line  Transportation 
of  Petrolciun,  pp.  22-24. 


Standard  OU  Company  and  the  railroads  it  took  it  nine  years  to 
complete  its  line  to  tidewater.  An  earlier  enterprise — ^The  Tide 
Water  Pipe  Company,  the  first  company  to  lay  a  pipe-line  to  the 
seaboard — ^was  so  harried  by  the  Standard  interests  that  it  even- 
tually capitulated.  Had  the  independents  been  left  alone,  they 
would  undoubtedly  have  much  extended  their  pipe-line  facili- 

It  is  apparent  that  if  there  is  to  be  effective  competition  in  the 
sale  of  petroleum  products,  the  pipe-lines,  which  carry  the  crude 
oil,  must  be  open  to  all  refiners  on  equal  and  fair  terms,  both  as  to 
rates  and  facilities.  The  analogy  of  the  anthracite  railroads  and 
the  commodity  clause  would  suggest  the  desirability  of  definitely 
separating  the  ownership  of  the  pipe-lines  and  of  the  refineries. 
Whenever  a  carrier  has  a  financial  interest  in  reducing  the  volume 
of  traffic  offered  to  it  for  transportation  over  its  line,  it  is  only 
with  great  difficulty,  if  at  all,  that  it  can  be  forced  to  offer  satis- 
factory facilities  at  reasonable  rates  to  its  would-be  patrons.  The 
Federal  Trade  Commission,  it  may  be  observed,  has  strongly 
recommended  that  the  ownership  of  the  pipe-lines  be  segregated 
from  the  other  branches  of  the  petroleum  industry.* 

Railroad  Discriminations 

Through  its  ownership  of  pipe-lines  the  Standard  had  an 
advantage  over  its  competitors.  In  addition,  through  railroad 
discrimination  it  was  able  to  get  its  refined  products  to  market  on 
better  terms  than  the  independents. 

In  the  petroleum  business  the  cost  of  transportation  is  a  vital 
factor.  The  importance  of  transportation  arises  out  of  the  fact 
that  the  cost  of  refining,  even  including  in  the  cost  a  reasonable 
profit  to  the  refiner,  is  very  low  as  compared  with  the  freight 
rates  on  the  transportation  of  refined  oil  to  market.  The  operat- 
ing expense  of  refining  averaged  in  1906  about  three-fourths  of  a 
cent  per  gallon.^  A  net  return  of  one-half  a  cent  per  gallon  was 
considered  an  ample  pro6t.'    It  follows,  therefore,  that  one  and 

*  Report  on  Price  of  Gasoline  in  1Q15,  pp.  17-18. 

*  Report  on  the  Petroleum  Industry,  part  II,  p.  14. 

*  Report  on  the  Transportation  of  Petroleum,  p.  34. 



a  half  cents  per  gallon  provided  abundantly  for  operating  ex- 
penses and  profit.  But  this  was  less  than  the  freight  rate  on 
refined  oil  for  transportation  for  any  considerable  distance.  The 
rates  from  the  oil  regions  of  Pennsylvania  and  Ohio  to  the 
markets  of  the  middle  west  ranged,  roughly,  from  two  cents  to 
three  cents  per  gallon.^  It  is  apparent,  therefore,  that  a  com- 
paratively sUght  difference  in  rates  might  enable  one  refiner  to 
sell  at  a  profit  while  his  competitor  was  losing  money.  And  in 
this  industry,  as  in  most  all  others,  it  is  the  relativity  of  rates, 
rather  than  the  amount  of  the  rates  themselves,  which  most 
concerns  the  shipper. 

Illustrations  of  railroad  discrimination  in  favor  of  the  Standard 
Oil  Company  during  the.  early  years  of  its  history  have  already 
been  given.  The  present  account  deals  only  with  the  advantages 
enjoyed  by  the  Standard  at  the  time  when  the  Bureau  of  Cor- 
porations published  its  report  on  the  Transportation  of  Petro- 
leum.   To  quote  from  this  report: 

"The  general  result  of  the  investigation  [into  transportation  con- 
ditions for  the  preceding  three  or  four  years]  has  been  to  disclose 
the  existence  of  numerous  and  flagrant  discriminations  by  the 
railroads  in  behalf  of  the  Standard  Oil  Company  and  its  affiliated 
corporations.  With  comparatively  few  exceptions,  mainly  of 
other  large  concerns  in  CaUfomia,  tie  Standard  has  been  the  sole 
beneficiary  of  such  discriminations.  In  almost  every  section  of 
the  country  that  company  has  been  found  to  enjoy  some  unfair 
advantages  over  its  competitors,  and  some  of  these  discrimina- 
tions affect  enormous  areas."* 

The  discriminations  enjoyed  by  the  Standard  in  the  trans- 
portation of  oil  were  classed  in  the  report  of  the  Bureau  under 
four  heads:  (i)  secret  and  semi-secret  rates;  (2)  discriminations 
in  the  open  arrangement  of  rates;  (3)  discriminations  in  classi- 
fication and  rules  of  shipment;  (4)  discriminations  in  the  treat- 
ment of  private  tank  cars.  Data  on  the  first  two  only  will  be 
here  presented. 

(i)  Two  leading  instances  of  secret  and  semi-secret  rates 

*  Report  on  the  Transportation  of  Petroleum,  p.  34. 
•Ibid.,  p.  I. 


may  be  cited.^  The  first  deals  with  rates  from  Whiting,  Indiana, 
into  the  South.^  The  pubUshed  tariflF  from  Whiting  into  the 
South  was  made  up  of  a  rate  of  eleven  cents  per  hundred  pounds 
to  the  Ohio  river  plus  rates  of  varying  amounts  from  the 
Ohio  river  south.  This  arrangement  had  long  been  in  force, 
and  was  known  to  all  shippers.  The  Standard  Oil  Company, 
however,  shipped  its  oil  into  the  South  on  an  especially  low 
rate  applying  to  shipments  between  Dolton,  Illinois,  and  Grand 
Junction,  Tennessee.  This  rate  would  have  been  open  to  all 
shippers  had  they  known  of  its  existence;  but  they  did  not,  since 
Dolton  was  an  unimportant  junction  point  near  Chicago,  and 
the  ordinary  shipper  would  never  have  thought  of  looking  up 
the  rate  from  Dolton.  The  Standard  Oil  Company  knew  of  it, 
however,  since  it  was  made  for  its  benefit.  The  secrecy  of  the 
Dolton  rate  is  proven  by  the  fact  that  the  Chicago  and  Eastern 
Illinois,  the  road  making  the  rate,  reported  to  the  Bureau  rates 
from  Whiting  to  the, South  much  higher  than  those  which  were 
accorded  to  the  Standard  Oil  Company  on  shipments  by  way  of 
Grand  Junction.  By  means  of  this  secret  combination  of  rates 
via  Grand  Junction  the  Standard  shipped  oil  into  a  large  part 
of  the  South  at  an  average  of  one-fourth  less  than  the  published 
rate  from  Whiting,  and  approximately  one-third  less  than  the 
rates  from  competitive  refining  points  in  Ohio  and  Western 
Pennsylvania  no  farther  distant.  These  discriminatory  rates  had 
hardly  been  uncovered  by  the  Bureau  before  they  were  can- 
celled by  the  railroad.  But  meanwhile  the  business  of  the  in- 
dependents had  been  much  damaged. 

To  cite  a  second  instance,^  the  only  published  rate  on  oil  be- 
tween Whiting  and  East  St.  Louis,  Illinois,  was  the  regular  class 
rate  of  i8  cents  per  loo  pounds.  But  the  Standard,  practically 
from  the  opening  of  its  Whiting  refinery  in  1890,  had  been 
charged  only  6  cents  per  100  pounds.  The  shipments  of  the 
Standard  Oil  Company  were  very  large,  practically  its  entire 

*  For  other  instances,  see  Report  on  the  Transportation  of  Petroleum, 
pp.  8  seq. 

•  Described  in  Report  on  the  Transportation  of  Petroleum,  pp.  6-7, 12. 
'  Ibid.,  pp.  12-14. 


southwest  business  being  handled  from  Whiting  through  East 
St.  Louis.  The  independent  refiners  in  northern  Ohio  and 
western  Pennsylvania  were  charged  from  17  to  24^  cents  on 
shipments  to  East  St.  Louis,  or  from  11  to  i8J^  cents  per  100 
pounds  more  than  the  Standard  rate  to  St.  Louis  from  Whiting. 
Had  the  adjustment  of  rates  on  oil  been  on  the  same  basis  as  on 
most  other  commodities,  Whiting  would  have  enjoyed  lower 
rates  to  St.  Louis  than  would  centers  of  independent  refining, 
but  the  difference  in  favor  of  Whiting  would  not  have  been  more 
than  five  to  ten  cents,  instead  of  eleven  to  eighteen  and  a  half 
cents.  With  the  aid  of  this  six  cent  special  rate,  combined  with 
other  minor  discriminations  in  the  rates  beyond  East  St.  Louis, 
the  Standard  Oil  Company  was  enabled  to  establish  a  well-nigh 
complete  monopoly  throughout  the  southwest.  As  soon  as  this 
secret  six  cent  rate  was  uncovered  by  the  Bureau — the  railroad 
officials  admitted  it  was  secret — it  was  cancelled,  and  a  rate  of 
ID  cents  per  100  pounds  was  substituted  therefor.  Yet  even  this 
ID  cent  rate  was  unreasonably  favorable  to  the  Standard  plant 
at  Whiting  as  compared  with  rates  from  competing  refining 
points  to  East  St.  Louis. 

The  secret  rates  enjoyed  by  the  Standard  Oil  Company 
naturally  helped  it  to  maintain  its  monopolistic  position.  With 
the  idd  of  its  favorable  freight  rates,  the  Standard  was  able  to 
sell  oil  in  competitive  areas  at  prices  which  were  profitable  to  it, 
but  which  left  no  profit  to  its  competitors.  Upon  the  elimination 
of  the  competitors,  the  Standard  advanced  its  prices  to  several 
cents  above  the  cost  of  refining,  and  thus  made  enormous 

(2)  Discriminations  in  the  open  arrangement  of  rates.  Almost 
as  important  as  the  secret  discriminations  in  rates  were  the  open 
discriminations.   To  quote  from  the  report  of  the  Bureau: 

"Almost  everywhere  the  rates  from  the  shipping  points  used 
exclusively,  or  almost  exclusively,  by  the  Standard  are  rela- 
tively lower  than  the  rates  from  the  shipping  points  of  its  com- 
petitors. Rates  have  been  made  low  to  let  the  Standard  into 
markets,  or  they  have  been  made  high  to  keep  its  competitors 
out  of  maricets.    Trifling  differences  in  distances  are  made  an 


excuse  for  large  differences  in  rates  favorable  to  the  Standard  Oil 
Company,  while  large  differences  in  distances  are  ignored  where 
they  are  against  the  Standard.  Sometimes  connecting  roads 
prorate  on  oil — that  is,  make  through  rates  which  are  lower  than 
the  combination  of  local  rates;  sometimes  they  refuse  to  prorate; 
but  in  either  case  the  result  of  their  policy  is  to  favor  the  Stand- 
ard Oil  Company.  Different  methods  are  used  in  different 
places  and  imder  different  conditions,  but  the  net  result  is  that 
from  Maine  to  California  the  general  arrangement  of  open  rates 
on  petroleum  oil  is  such  as  to  give  the  Standard  an  unreasonable 
advantage  over  its  competitors. 

The  conclusion  is  unavoidable  that  the  Standard  Oil  Com- 
pany has  had  an  important  voice  in  the  construction  of  such 

As  illustrating  the  favoritism  shown  the  Standard  Oil  Com- 
pany we  refer  again  to  the  rates  out  of  Whiting,  Indiana.^  The 
Whiting  refinery  was  the  Standard's  most  important  refinery 
from  the  standpoint  of  distribution  in  this  country;  it  produced 
one-third  of  all  the  refined  oil  sold  by  the  Standard  in  the  United 
States.  Into  practically  all  of  the  territory  served  by  it,  the  open 
rates  from  Whiting  were  lower  than  the  geographical  location  of 
the  plant  justified.  This  advantage  was  increased  through  the 
refusal  of  the  railroads  to  prorate  on  oil.  Prior  to  the  opening  of 
the  Whiting  refinery  the  western  railroads  had  prorated  on  ship- 
ments of  oil  from  the  eastern  refining  points  to  the  Middle  and  Far 
West,  as  they  had  on  practically  all  other  commodities.  But 
shortly  before  1890  the  railroads  discontinued  this  practice,  so 
far  as  oil  shipments  were  concerned.  This  meant  that  the  east- 
em  refiners,  in  order  to  get  into  western  markets,  had  to  pay 
the  local  rate  to  Chicago  plus  the  rate  from  Chicago  to  destina- 
tion. The  disadvantage  to  which  they  were  put  in  competi- 
tion with  the  Standard  plant  at  Whiting  was  thus  measured  by 
the  local  rate  to  Chicago,  which  amounted  to  from  twelve  to 
nineteen  and  a  half  cents  per  hundred  pounds.  Had  prorating 
arrangements  been  maintained,  this  disadvantage  would  have 
been  much  less. 

Notwithstanding  the  subsequent  cancellation  of  the  secret 

'  Report  on  the  Tran^wrtation  of  Petroleum,  pp.  20-21. 

*  Described  in  Report  on  the  Transportation  of  Petroleum,  pp.  21-22. 


rates  to  Grand  Junction  and  other  points,  Whiting  was  still 
favored  over  independent  refining  centers  in  the  open  rates  into 
the  entire  south.  From  Whiting  into  the  south  the  rate  on  oil  was 
three  and  a  half  cents  less  than  from  Toledo,  four  cents  less  than 
from  Cleveland,  and  seven  and  a  half  cents  less  than  from  Pitts- 
burg, although  on  other  commodities  the  rates  from  all  these 
cities  were  practically  the  same  as  from  Whiting.  The  success  of 
this  policy  of  discrimination  between  refining  points  was  largely 
dependent,  of  course,  upon  the  fact  that  a  large  proportion  of  the 
Standard's  traffic  originated  at  places  where  the  independent 
refiners  had  no  plants.  The  Standard  supplied  the  greater  part 
of  the  oil  which  it  distributed  in  the  United  States  from  its  great 
refineries  at  the  seaboard  and  near  Whiting,  and  there  were  few 
competitors  at  the  seaboard  and  none  at  Whiting. 

Unfair  Methods  of  Competition  in  the  Sale  of  the  Refined 

Petroleum  Products 

The  most  important  of  the  unfair  practices  of  the  Standard,  so 
far  as  they  relate  to  selling,  has  been  local  price  cutting,  or 
local  price  discrimination  as  it  is  generally  called.  The  prices 
charged  by  the  Standard  Oil  Company  for  petroleum  products 
have  varied  greatly  in  different  towns  according  to  the  amoimt 
of  competition.  This  has  been  true  of  all  petroleum  products, 
but  has  been  most  glaring  with  respect  to  illuminating  oil  and 
gasoline.  After  making  allowance  for  freight  charges,  which 
generally  form  a  considerable  part  of  gross  prices,  marked  dif- 
ferences in  prices  appeared,  not  only  between  different  states 
or  sections  of  the  coimtry,  but  also  between  the  different  towns 
of  each  state.  These  differences  in  prices  could  sometimes  be 
explained,  in  part  at  least,  by  differences  in  production  and 
marketing  costs,  yet  in  many  cases  they  reflected  solely  the 
intensity  of  competition  encountered. 

The  fact  of  varying  prices  in  different  sections,  indicating 
local  price  discrimination,  is  shown  by  the  following  table,  giv- 
ing the  average  price  (less  freight  charges)  paid  by  retailers  for 
illuminating  oil  purchased  from  the  Standard.^ 

^  Report  on  the  Petroleum  Industry,  part  n,  p.  3r. 



AvBSAGE  Price  of  Illuminating  Oil,^  Less  Freight,  Dbceubbr,  1904, 

BY  States 

North  Atlantic  Division:      per  gallon 

Maine 10.4 

New  Hampshire 10.3 

Vermont 9.0 

Massachusetts 9.9 

Rhode  Island 9.6 

Connecticut 8.9 

New  York 10. o 

New  Jersey 9.8 

Pennsylvania 8.7 

South  Atlantic  Division: 

Delaware 7.7 

Maryland  &  D.  C 9.2 

Virginia 9.7 

West  Virginia 9.0 

North  Carolina 10.3 

South  Carolina 10.8 

Georgia 11.6 

Florida 12.8 

North  Central  Division: 

Ohio 8.5 

Indiana 9.3 

Illinois 9.1 

Michigan 9.0 

Wisconsin 9.2 

Minnesota 9.6 

Iowa ...    10.2 

Missouri 10.9 

North  Dakota 11.  i 

North  Central  Division  Cents 

(cont.) :  per  gallon 

South  Dakota 12.9 

Nebraska 10.5 

Kansas 11. 4 

South  Central  Division: 

Kentucky 9.4 

Tennessee 11. 6 

Alabama 11. 6 

Misdssippi 9.8 

Louisiana 9.5 

Arkansas 13.9 

Indian  Territory 12.5 

Oklahoma 14.0 

Texas 11. 6 

Western  Division: 

Montana 15.6 

Idaho 15.6 

Wyoming 15 . 6 

Colorado 16. 2 

New  Mexico 13 . 2 

Arizona 10 . 7 

Utah 14.8 

Nevada 16.4 

Washington 15.7 

Oregon 15.3 

Cahfomia 11. i 

Northern  California 12.4 

Southern  California 7.2 

From  this  table  it  appears  that  the  average  price  of  illumin- 
ating oil  was  lowest  in  Delaware — 7.7  cents  per  gallon — and 
highest  in  Colorado — 16.2  cents  per  gallon — ^not  counting  Nev- 
ada, the  quotation  for  which  represented  only  one  town.  The 
average  price  in  Colorado  was  thus  more  than  twice  the  average 

1  There  are  several  grades  of  illuminating  oil,  but  most  of  the  oil  sold  in 
this  country  is  the  second  grade  of  water-white  oil,  and  the  prices  of  illum- 
inating oil  quoted  in  the  Report  of  the  Bureau  of  Corporations  are  for  the 
most  part  the  prices  of  this  grade  of  oil. 



price  in  Delaware.  According  to  the  Report  of  the  Bureau  of 
Corporations  not  more  than  three  and  one-half  cents  of  the  dif- 
ference in  price  in  these  two  states  could  be  explained  by  dif- 
ferences in  producing  and  marketing  costs;  and  of  course  none 
of  the  difference  in  price  could  be  explained  by  differences  in 
freight  rates,  since  the  price  in  each  case  was  that  paid  by  the 
retaUer,  less  freight  charges  from  the  Standard  refinery. 

Again,  the  prices  (freight  rates  deducted)  within  the  Missis- 
sippi basin  from  the  Northern  border  to  the  Gulf  of  Mexico 
ranged  from  8.5  cents  in  Ohio,  where  several  independent  plants 
were  located,  to  13.9  cents  in  parts  of  Arkansas.  This  territory 
was  largely  supplied  with  oil  by  the  Standard  refineries  at  Whit- 
ing, Indiana,  and  Cleveland  and  Lima,  Ohio;  and  these  refineries 
used  the  same  kind  of  crude  oil,  and  had  practically  the  same 
production  costs.  In  fact,  most  of  this  area  was  served  by  the 
Whiting  refinery  alone. 

A  very  striking  instance  of  sectional  price  variation  is  found 
on  the  Pacific  coast.  The  Standard  refined  oil  at  its  great  re- 
finery near  San  Francisco.  The  average  price  of  this  oil,  the 
freight  rate  deducted,  in  December,  1904,  was  7.2  cents  per 
gallon  in  southern  California,  and  12.4  cents  per  gallon  in 
northern  California.  The  obvious  explanation  is  that  there  were 
independent  refineries  in  southern  California.  In  Oregon,  which 
drew  its  supplies  from  the  same  source,  the  price  (freight  rate 
deducted)  averaged  15.3  cents  per  gallon,  and  in  Washington, 
15.7  cents.  The  price  in  the  northern  Pacific  states  was  thus 
more  than  twice  as  high  as  in  southern  California  for  exactly 
the  same  oil. 

The  figures  for  gasoline  show  practically  the  same  amount  of 
price  variation  between  the  several  states  and  sections  of  the 
country  as  has  been  shown  to  exist  in  the  case  of  illuminating  oil. 

Equally  significant  are  the  differences  in  prices  charged  for 
iUuminating  oil  and  gasoline  in  towns  within  the  same  state. 
This  subject  is  fully  discussed  in  the  report  of  the  Bureau  of 
Corporations,  and  the  details  need  not  be  reproduced  here.^ 

^Sce  Report  on  the  Petroleum  Industry,  part  II,  pp.  35-^9,  48o-507» 


Summarizing  the  data,  in  thirty-one  of  the  states  and  territories, 
the  range  between  the  highest  and  lowest  price  of  illuminating 
oil,  freight  deducted,  was  at  least  3  cents;  in  ten  states  the  range 
was  at  least  5  cents;  and  in  one  state — New  Mexico — the  highest 
price  charged  within  the  state  exceeded  by  13.2  cents  per  gallon 
the  lowest  price  charged.  In  most  cases,  according  to  the  report, 
only  a  small  part  of  these  differences  in  price  within  a  single 
state  was  attributable  to  differences  in  marketing  cost. 

With  respect  to  a  number  of  the  towns  in  which  the  price  of 
illimiinating  oil  was  relatively  low,  the  Bureau  made  inquiry 
into  the  cause  thereof,  and  found  that  in  the  majority  of  cases 
these  low  prices  were  due  to  the  existence  of  active  competition. 
To  quote  from  the  report: 

"The  evidence  is,  in  fact,  absolutely  conclusive  that  the  Stand- 
ard Oil  Company  charges  altogether  excessive  prices  where 
it  meets  no  competition,  and  particularly  where  there  is  little 
likelihood  of  competitors  entering  the  field,  and  that,  on  the 
other  hand,  where  competition  is  active,  it  frequently  cuts  prices 
to  a  point  which  leaves  even  the  Standard  little  or  no  profit,  and 
which  more  often  leaves  no  profit  to  the  competitor,  whose 
costs  are  ordinarily  somewhat  higher."  » 

The  significance  of  these  differences  in  prices  appears  when  it 
is  realized  that  a  reduction  of  about  7  mills  per  gallon  in  the 
price  of  illuminating  oil  would  have  converted  a  profit  of  10  per 
cent  on  the  investment  in  refining  and  marketing  facilities  into 
an  actual  loss.^  The  differences  in  price  between  competitive 
and  noncompetitive  towns  and  areas,  even  after  making  Uberal 
allowance  for  possible  differences  in  production  and  marketing 
costs,  often  amounted,  as  we  have  seen,  to  several  cents  i>er  gal- 
lon. How  disastrously  the  practice  of  local  price  discrimination 
affected  the  independent  refiners  must,  therefore,  be  quite 

In  carrying  out  its  practice  of  local  price  discrimination  the 
Standard  Oil  Company  made  frequent  use  of  bogus  independent 
concerns,  that  is,  concerns  paraded  as  independent,  yet  in 

^  Report  on  the  Petroleum  Industry,  part  II,  p.  39. 
*  Ibid.,  p.  29. 


reality  controlled  by  the  Standard.  By  means  of  these  concerns 
the  Standard  was  able  to  cut  prices  to  the  customers  of  the  in- 
dq)endent  refiner,  without  incurring  the  additional  loss  involved 
in  a  reduction  of  prices  to  the  entire  trade  of  the  territory  affected. 
By  this  device,  also,  anti-trust  sentiment,  which  often  took  the 
form  of  a  refusal  to  buy  from  a  trust,  was  overcome.  The 
government  in  its  Brief  presented  a  list  of  63  concerns  which  had 
been  operated  by  the  Standard  as  bogus  independents.^  The 
most  extensive  of  these  companies  was  the  Republic  Oil  Com- 
pany (a  reorganization  of  the  firm  of  Scofield,  Shurmer  and 
Teagle).  The  chief  fimction  of  this  company,  according  to  the 
Supreme  Court  of  Missouri,  was  to  follow  up  the  business  of  the 
independent  refiners,  and  under  the  guise  of  being  an  independ- 
ent company,  and  by  means  of  rebates,  fraud,  and  deception,  to 
wage  a  most  vigorous  competition  against  them  in  all  districts 
where  they  competed  with  the  Standard  companies.  And  when, 
to  quote  the  Court,  "the  Republic  Oil  Company  had  sufficiently 
chastised  the  independents,  and  thereby  curbed  their  desire 
and  ambition  to  increase  the  volume,  of  their  business,  by 
the  reduction  of  price  of  oils  or  otherwise,  it  would  then  practi- 
cally retire  from  the  field  of  operation  and  eagerly  await  the  next 
combat  with  the  independents,  if,  perchance,  any  one  of  them 
was  so  timorous  as  to  challenge  the  monopoly  of  those  two  com- 
panies [the  Standard  Oil  Company  of  Indiana  and  the  Waters 
Pierce  Oil  Con^)any]  by  seeking  any  portion  of  their  trade."  ^ 
The  Standard  was  able  to  conduct  this  policy  of  local  price 
cutting  with  effectiveness  because  of  the  intimate  knowledge  it 
had  of  its  competitors'  business  dealings.  This  knowledge  was 
obtained  by  the  Standard  Oil  Company  and  its  various  subsid- 
iary marketing  companies  through  a  highly  developed  s)rstem 
of  e^ionage  over  the  affairs  of  its  competitors.  The  desired  in- 
formation as  to  the  receipts  and  shipments  of  oil  by  competitors 
was  obtained  in  part  through  the  observations  of  its  own  staff,  y 
and  in  part  by  bribing  railroad  employees.'  . 

*  Brief  for  the  United  States  (no.  725),  vol.  II,  pp.  520-523. 

'218  Missouri  Reports  445. 

»  Report  on  the  Petroleum  Industry,  part  I,  p.  302;  and  part  II,  p.  58. 


The  practice  of  local  price  discrimination — a  f onn  of  predatory 
competition — was  greatly  facilitated  by  the  Standard's  method 
of  marketing.  The  Standard  had  largely  eliminated  the  jobbers, 
delivering  its  oil  directly  to  the  retailer  by  means  of  its  own  tank 
cars,  tank  stations,  and  tank  wagons.  This  bulk  S3rstem  of 
distribution  has  great  advantages  over  barrel  or  package  distri- 
bution. In  the  first  place  it  costs  less  to  ship  oil  in  bulk  than  in 
barrels  or  other  packages,  and  there  is  often  a  saving  in  the 
local  deUvery  of  oil  from  the  railway  to  the  retailer.  And  per- 
haps more  important  is  the  fact  that  barreled  oil  is  likely  to  leak, 
to  cause  dirt,  bad  odors,  and  fire,  and  therefore  the  retail  dealer 
will  ordinarily  prefer  to  buy  oil  from  the  tank  wagon  even  at  a 
somewhat  higher  price.  Dealing  directly/ with  the  retailer,  and 
sometimes  even  directly  with  the  consumer,  the  Standard  could 
obviously  adjust  its  prices  in  the  various  markets  in  such  a  way 
as  to  stifle  threatened  competition,  as  it  could  not  had  its 
product  been  handled  largely  through  jobbers. 

This  in  itself  excellent,  because  economical,  bulk  system  of 
distribution  further  contributed  to  the  maintenance  of  the  Stand- 
ard's monopoly,  in  that  one  tank  wagon  can  serve  a  given  town 
(if  a  small  one),  or  a  section  thereof  (if  a  large  one),  as  well  as  two 
can,  and  at  a  much  less  expense  per  unit  of  product.  This  is  be- 
cause of  the  elimination  of  a  dupUcate  service.  The  result  is  that 
when  once  a  concern  has  the  facilities  for  supplying  a  given  town, 
other  concerns  naturally  hesitate  to  invade  its  territory.  They 
well  realize  that  severe  competition  may  result,  and  in  this 
competition  the  concern  with  an  established  clientele  will  have 
the  advantage.  However,  if  the  first  concern  to  enter  the  field 
merely  does  a  local  business  it  will  notLejahle  to  prevent  compet- 
itors from  gaining  a  foothold,  unless  indeed  it  should  be  willing 
to  cut  prices  on  all  its  sales;  and  this  would  be  quite  as  costly  to 
it  as  to  its  competitors.  But  if  one  of  the  competitors  does  a 
nation-wide  business,  the  case  is  quite  different.  Thus,  the 
Standard  Oil  Company,  doing  business  throughout  the  whole 
country,  could  cut  prices  in  the  particular  localities  where  there 
was  competition,  and  could  meet  the  losses  thus  incurred  out  of 
the  profits  gathered  in  elsewhere.   A  concern  doing  business  in  a 


limited  territory  must  therefore  generally  succumb  in  a  test  of 
strength  with  the  Standard;  and  such  has  been  the  experience  of 
competition  in  this  industry. 

The  Standard  was  thus  able  to  ward  off  competition  in  the 
sale  of  the  greater  part  of  its  product.  However  tempting  the 
prices,  independents  hesitated  to  enter  Standard  markets.  They 
could  compete  successfully  only  if  able  to  establish  tank  sta- 
tions and  tank  wagon  delivery  on  a  large  enough  scale  to  reduce 
the  cost  per  unit  of  product  to  a  reasonable  figure;  and  they  had 
learned  by  bitter  experience  that  if  they  made  the  venture  the 
Standard  was  likely  to  cut  prices  below  the  cost  of  production 
and  delivery.  They  realized  that  the  Standard  could  afford  this 
interminably,  if  the  price  cutting  was  sujficiently  localized,  and 
that  they  could  not.  It  is  obvious  that  only  a  concern  which  had 
strong, financial  backing,  and  which  sold  oil  in  most  of  the  leading 
mai^ts  of  the  country,  could  save  itself  frdm  the  disastrous 
effects  of  the  practice  of  price  discrimination,  and  compel  the 
Standard,  if  that  company  should  determine  to  put  prices  below 
cost,  to  accept  losses  as  great  as  its  own.  And  no  concern  had 
been  able  during  the  period  down  to  the  dissolution  of  the  Stand- 
ard Oil  Company  in  191 1  to  develop  a  business  of  such  a  size. 
Hie  Standard  had  been  able  to  keep  competition  localized  and 
scattered,  and  thus  subject  to  its  control.  The  wonder  is,  indeed, 
that  competition  was  not  entirely  destroyed,  unless  perchance 
this  was  not  desired  by  the  Standard  from  a  fear  of  drastic 
governmental  action. 

We  have  noted  the  monopolistic  position  of  the  Standard  Oil 
Ccxnpyany,  and  have  seen  by  what  means  it  achieved  and  main- 
tained this  position.    How  has  the  consumer  fared  at  the  hands  4 
of  this  organization?   What  has  been  the  course  of  prices? 

The  claim  has  been  made  that  reviewing  the  history  of  the  oil  , 
industry  as  a  whole,  the  Standard  has  reduced  prices,  and  thus 
has  benefited  the  consumer;  that  because  of  its  remarkable 
efficiency  and  the  concentration  of  the  business  in  the  hands  of  a 
trust  the  Standard  has  charged  prices  lower  than  would  have 
prevailed  under  a  competitive  regime. 

Satisfactory  data  showing  the  course  of  prices  of  petroleum 


products  in  the  United  States  could  not  be  obtained  except  for 
comparatively  recent  years.  This  was  because  the  Standard  for 
many  years  had  sold  its  oU  for  the  most  part  directly  to  retail- 
ers, and  it  was  impossible  to  obtain  from  retail  dealers,  except 
during  recent  years,  sufficient  returns  to  show  the  true  price 
movement.  However,  an  idea  of  the  general  movement  of 
illuminating  oil  prices  in  this  country  can  be  gained  by  a  study  of 
export  prices,  though  these  export  prices  must  be  used  with 
caution.  The  table  below  shows  the  movement  of  export  prices 
from  1866-1905 . 

Average  Price  of  Pennsylvania  Crude  at  Wells  and  Average  Price 
OF  Export  Illuminating  Oil  in  Barrels  at  New  York,  with 
Margin  between  Them,  1866-1905  * 

(Cents  per  gaUon) 




Export  oil 
in  barrels 

























9  15 


23 -75 

15  03 



*  '^*'  / * 





**'»*'•  * 



13  OS 









**'»  ••• 


*-*^  1 0 


*'^/*T * 



*"/'' * 




M.%J  l\f  ............... 




*  Report  on  the  Petroleum  Industry,  part  II,  p.  49.  The  prices  from 
1866-1878  have  been  reduced  to  a  gold  basis.  The  export  prices  are  for  oil  in 
barrels,  and  though  there  has  been  some  fluctuation  in  the  price  of  barrels 
independent  of  that  of  oil,  nevertheless  the  figures  show  approximately  the 
price  of  oil  itself. 



Average  Price  of  Pemnsylvanu  Crude  at  Wells— Con(tnt4«i 

(Cents  per  gaUon) 










2. II 




3  10 




Expert  oil 
in  barrels 

7. II 


















From  an  examination  of  this  table  it  appears  that  the  margin 
between  crude  and  refined  oil  declined  almost  steadily  from  23.75 
cents  per  gallon  in  1866  to  11.96  cents  in  1873.  Prior  to  1874  the 
oil  industry  was  a  highly  competitive  one,  and  obviously  no  one 
concern  could  claim  the  credit  for  the  reduction  in  the  margin. 
The  decline  in  the  margin  between  1866  and  1873,  it  should  be 
noted,  exceeded  the  total  decline  since  1873.  This  great  de- 
cline in  the  margin  under  a  competitive  regime — a  decline 
due  largely  to  a  reduction  in  the  cost  of  production — ^would 
appear  to  foreshadow 'a  still  further  reduction  in  costs  and 
in  the  margin,  trust  or  no  trust,  though  not  in  all  probability 
at  so  rapid  a  rate  as  during  the  earlier  period.     Again,  it 


should  be  noted  that  most  of  the  declme  in  the  margin  which 
took  place  after  1873  had  come  by  1879.  By  this  time  the 
Standard  had  obtained  its  monopolistic  control  of  the  in- 
dustry. The  margin  had  been  11.96  cents  in  1873;  in  1879  it 
was  6.05  cents.  This  reduction  in  the  margin  from  1874-1879 
was  the  result  in  large  measure  of  a  decline  in  transportation 
costs.  The  rate  on  illuminating  oil  from  the  Pennsylvania  fields 
to  New  York,  which  had  been  4  cents  per  gallon  in  1874,  fell  in 
1879,  when  rates  were  being  slashed,  as  low  as  i  cent  per  gallon.^ 
The  building  of  pipe-lines  to  the  seaboard  likewise  reduced  the 
cost  of  transportation,  yet,  as  has  been  noted  above,  the  Stand- 
ard did  not  originate  trunk  pipe-lines;  in  fact,  it  first  learned 
through  the  successful  experiment  of  the  Tide  Water  Pipe  Com- 
pany that  this  means  of  transportation  was  feasible.  The  con- 
clusion of  the  Bureau  with  respect  to  the  history  of  prices  to  1879 
is  that  the  remarkable  decline  in  the  margin  between  crude  oU 
and  refined  oil  was  chiefly,  if  not  wholly,  due  to  natural  or  exter- 
nal causes,  quite  independent  of  any  special  influence  of  the 
Standard  Oil  Company.^  The  Standard,  in  its  opinion,  could 
claim  little,  if  any,  credit  for  the  reduction. 

The  reduction  in  the  margin  since  1879  has  been  noteworthy, 
yet  it  has  been  by  no  means  as  great  as  prior  to  1879.  In  1879 
the  margin  was  6.05  cents  per  gallon;  in  1905  it  was  3.90  cents, 
though  the  average  for  the  last  five  years  shown  in  the  table  was 
as  high  as  4.46  cents.  It  should  be  clear  that  the  Standard  was 
not  responsible  for  all  of  this  limited  reduction  in  the  margin. 
Progress  in  the  industry  was  only  to  be  expected,  combination 
or  no  combination.  Furthermore,  the  export  prices  during  the 
period  under  consideration  were  not  an  accurate  measure  of  the 
domestic  prices;  domestic  prices  rose  much  more  rapidly  than 
export  prices.  The  average  margin  between  the  quoted  price  of 
water-white  oil  in  barrels  to  jobbers  at  New  York,  and  the  price 
of  Pennsylvania  crude  in  1882  (the  first  available  year),  was  9.2 
cents  per  gallon,  while  in  1903  it  was  as  high  as  10.  i  cents  per  gal- 
lon; in  1904  it  was  9.8  cents;  and  in  1905'it  was  9.3  cents.*    This 

*  Report  on  the  Petroleum  Industry,  part  II,  p.  50.  *  IWd. 

•  Ibid.,  p.  51. 


indicates  an  actual  advance  in  the  domestic  margin  since  1882, 
but  the  value  of  the  barrels  had  increased  also,  so  that  an  exact 
comparison  between  the  two  periods  can  not  be  made. 

Such  slight  reduction  as  has  taken  place  in  the  margin  since 
the  early  eighties  has  been  counterbalanced,  moreover,  by  an 
increase  in  the  quantity  and  value  of  the  by-products  obtained. 
That  is  to  say,  because  of  the  increase  in  the  value  of  the  by- 
products the  margin  should  have  declined  even  more  than  it  did. 
While  the  Standard  has  imdoubtedly  eflPected  greater  improve- 
ments in  the  utilization  of  by-products  than  have  its  competi- 
tors, to  attribute  all  the  improvements  to  the  Standard  is,  ac- 
cording to  the  Commissioner,  wholly  inconsistent  with  the  facts 
and  out  of  accord  with  the  history  of  improvements  in  indus- 
tries in  which  competition  has  been  active.^  It  is  certain,  says 
the  CcMnmissioner,  that  imder  free  competition,  there  would 
have  been  a  suflScient  increase  in  the  value  of  by-products  to 
permit  a  greater  reduction  of  the  margin  between  crude  and 
illimiinating  oil  than  the  Standard  made.  To  quote  from  the  re- 
port of  the  Bureau  of  Corporations,  "  the  Standard  has  consis- 
tently used  its  power  to  raise  the  price  of  oil  during  the  last  ten 
years,  not  only  absolutely  but  also  relatively  to  the  cost  of  crude 

From  this  brief  analysis  of  prices,  it  would  appear  that  the 
Standard  Oil  Company  has  showed  as  httle  consideration  for  the 
consimier  as  for  its  competitors.  This  conclusion  is  reenforced 
by  an  examination  of  the  profits  obtained  by  the  Standard  or- 

The  projSts  of  the  Standard  Oil  Company  have  been  enonnous, 
both  in  amount  and  in  proportion  to  the  investment  of  the  com- 
pany. This  becomes  apparent  upon  an  examination  of  the 
table  on  page  88. 

*  Report  on  the  Petroleum  Industry,  part  II,  p.  51. 
«Ibid.,  p. 



Dividends  and  Profits  of  the  Standard  Oil  Trust  (i  882-1 899)  and 
OF  THE  Standard  Oil  Company  (1899-1906)  * 




















Per  cent 


or  capital 






of  net 

of  net 


at  end  of 



Rate  of 









mean  net 




t  3,695 





















II. 8 

II. 0 


















13  3 


10,620  ■ 






















15. 4 






II  .9 






II. 6 






'    17.3 



31  00 


















33  00 














































*  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  6,  and  vol.  II,  pp.  8-9; 
and  Report  on  the  Petroleum  Industry,  part  II,  pp.  39-40. 

*  Also  stock  dividend  of  20  per  cent,  amounting  to  $15,028,200. 

*  There  are  no  data  by  which  to  show  the  earnings  of  these  three  years 
sq)arately;  the  figures  here  given  show,  with  substantial  accuracy,  the 
average  for  the  three  years^  1897-1899.  Brief  for  the  United  States  (no. 
725),  vol.  II,  p.  8. 


The  Standard  Oil  Company  thus  paid  out  in  dividends  during 
1882  to  1906  the  sum  of  $548,436^6,  an  average  of  24  per 
cent  per  year.  For  the  ten  years  ending  in  1906,  the  dividends 
ranged  from  30  per  cent  to  48  per  cent,  and  averaged  39.7  per 
cent.  Furthermore,  a  large  part  of  the  profits  was  not  distrib- 
uted to  stockholders,  but  was  put  back  into  the  business.  The 
total  net  earnings  from  188 2-1906  amounted  to  $S^SyyS^,yS^f 
exceeding  the  dividends  by  $290,347,337.  During  the  ten  years 
ending  in  1906,  the  ratio  of  net  earnings  to  capital  ranged  from 
48.8  per  cent  to  84.5  per  cent,  the  average  for  the  ten  year  period 
being  over  61  per  cent. 

The  rate  of  dividends  and  of  net  earnings  becomes  even 
larger,  moreover,  if  applied,  not  to  the^tpital  stock,  but  to  the 
actual  investment  in  the  business,  excHRlve  of  the  reinvestment 
of  surplus  earnings.  This  investment,  \letermined  by  adding  to 
the  appraised  value  of  the  properties  in  1882  ($55,710,698)  the 
simis  invested  since  1882,  amounted  in  1906  to  $69,024480.^  Of 
course,  the  value  of  the  property  held  by  the  Standard  in  1906 
much  exceeded  this  figure,  but  this  excess  value  came  from  the 
building  up  of  the  property  through  the  reinvestment  of  the 
surplus  earnings.  Tested  by  the  investment  basis,  the  Standard 
Oil  C<»npany,  with  a  capitalization  in  1906  of  $98,338,382,  was 
overcapitalized  by  about  $30,000,000;  that  is,  its  stock  was 
watered  to  that  extent 

The  objection  may  be  made  that  the  rate  of  profit  on  the 

actual  investment  is  not  a  fair  basis  of  analysis;  that  a  fairer 

basis  is  the  ratio  of  dividends  and  net  earnings  to  the  value  of  the 

company's  property,  i.  e.,  to  its  net  assets.  There  has,  therefore, 

been  included  in  the  table  a  column  showing  the  per  cent  of  the 

net  earnings  to  the  mean  net  assets.   Naturally  these  figures  are 

more  favorable  to  the  Standard,  yet  even  these  figures  show 

how  profitable  the  prices  charged  by  the  Standard  have  been. 

The  net  earnings  of  the  Standard  for  the  ten  years  ending  in 

1906  averaged  over  25  per  cent  on  the  company's  net  assets. 

It  k  not  necessary  to  discuss  the  argument  that  prices  are 

reasonable  when  they  return  only  a  fair  profit  on  the  value  of  the 

*  Brief  for  the  United  States  (no.  725),  vol.  n,  pp.  4-5. 


property,  even  including  in  that  value  the  property  which  was 
acquired  out  of  surplus  earnings.  It  is  not  necessary  because 
viewed  from  any  standpoint  it  is  manifest  that  the  Bureau  of 
Corporations  spoke  truly  when  it  said  that  "the  domestic 
consumer  has  been  compelled  to  pay  an  exorbitant  tribute  to 
the  oil  monopoly.  '*  ^ 

It  is  apparent  that  the  profits  of  the  Standard  OD  Company 
have  been  enormous.  For  the  ten  years  ending  in  1906  these 
profits  averaged  almost  $60,000,000  i>er  year,  while  the  divi- 
dends averaged  nearly  $40,000,000  per  year.  The  $20,000,000 
of  imdivided  profits  were  ample  to  provide  for  any  extension 
of  plant.  Much  of  the  $40,000,000  in  dividends  therefore 
went  into  other  industries — naturally  into  those  allied  with  the 
oil  industry.  Inasmuch  as  all  industries  depend  on  transporta- 
tion and  as  the  railroads  are  large  buyers  of  oil  products,  inti- 
mate aflSUations  with  the  railroad  companies  were  well  worth 
cultivating.  We  find,  therefore,  that  the  Standard  Oil  capi- 
talists became  large  shareholders  in  railroad  companies.  We 
find  also  that  the  Standard  Oil  interests  went  into  the  gas  and  the 
electric  lighting  businesses.  The  Consolidated  Gas  Company 
of  New  York  City,  for  example,  was  once,  if  not  still,  a  Standard 
Oil  affair.  We  find  these  same  interests  in  the  steel  business, 
notably  as  large  stockholders  in  the  United  States  Steel  Cor- 
poration. We  find  them  interested  in  copper,  the  Amalga- 
mated Copper  Company  being  a  notable  example.  We  find  them 
in  the  glucose  business,  particularly  in  the  Com  Products  Re- 
fining Company.  We  find  that  they  have  even  invaded  the 
banking  field.  In  this  field  they  could  probably  say,  with 
iEneas,  quorum  pars  magna  fuiy  a  great  part  of  which  I — not 
was — ^but  am.    They  could  even,  with  Pistol,  exclaim 

Why,  then  the  world's  mine  oyster, 
Which  I  with  sword  will  open. 

Also  in  other  realms  is  their  influence  felt — in  the  educational 
world,  in  religious,  humanitarian,  and  other  activities — with 
the  Congress  of  the  United  States  of  America  unwilling  to 

*  Reoort  on  the  Petroleum  Industry,  part  II,  p.  42. 


give  a  charter  to  a  $ioo,cxx5,cxx5  of  this  money,  to  be  devoted 
in  perp)etuity  to  the  good  of  mankind. 

Truly,  there  are  various  grave  and  far-reaching  problems 
connected  with  the  question  as  to  whether  a  monopoly  in  oil  is  to 
be  permitted  to  continue  as  being  on  the  whole  a  blessing  to 
mankind,  whether  a  few  cents  per  gallon  added  to  the  price  of  the 
oil  that  lights  the  humbler  worker's  home  or  to  the  price  of  the 
gasoline  that  drives  Ford  and  Packard  and  business  truck  is 
or  is  not  to  be  hereafter  the  stable  foundation  for  world-wide 
business  activities  and  for  humanitarian  succors  as  well. 



The  early  history  of  the  sugar  trust,  touched  on  in  chapter  III, 
may  be  briefly  reviewed.  The  Sugar  Refineries  Company — a 
trustee  device — ^had  been  organized  in  1887.  In  1890  this  ar- 
rangement was  declared  illegal  by  the  New  York  courts,  and 
as  a  result  a  reorganization  was  determined  upon.  In  January, 
1891,  the  American  Sugar  Refining  Company  was  chartered  in  the 
state  of  New  Jersey, — then  a  place  of  refuge  for  combinations 
and  trusts.  The  new  company  had  an  authorized  capitalization 
of  $50,000,000,  half  preferred  stock  and  half  common.*  The 
American  Sugar  Refining  Company  exchanged  its  capital  stock 
for  the  trust  certificates  of  the  Sugar  Refineries  Company,  and 
thus  obtained  control  over  the  various  corporations  previously 
controlled  by  the  trustees.  The  American  Sugar  Refining  Com- 
pany next  caused  the  several  corporations,  seventeen  in  num- 
ber, to  convey  to  it  their  entire  property,  real  and  personal;  and 

^On  the  American  Sugar  Refining  Company  see:  Original  petition  in 
United  States  v.  American  Sugar  Refining  Company  et  al.;  Hearings  before 
the  Special  Committee  of  the  House  on  the  Investigation  of  the  American 
Sugar  Refining  Company,  1911-1912;  House  Report  no.  31 12,  50th  Cong., 
I  St  Sess.,  1887-1888;  Report  of  Conmiittee  on  General  Laws  relative  to 
"Trusts"  and  "Sugar  Trusts,"  transmitted  to  the  New  York  Legislature, 
April  30,  1 891;  Report  of  Joint  Committee  of  the  Senate  and  Assembly 
appointed  to  investigate  trusts,  transmitted  to  the  New  York  State  Legis- 
lature, March  9,  1897  (Lexow  Report);  Industrial  Commission,  vol.  I,  pp. 
43-166, 801-812;  121  New  York  Reports  582-626;  156  U.  S.  1-46;  Report  of 
the  Federal  Trade  Commission  on  the  Beet  Sugar  Industry  in  the  United 
States,  May  24, 191 7;  Annual  Reports  of  the  Attorney  General  of  the  United 
States,  1909  ff.;  Willett  and  Gray's  Weekly  Statistical  Sugar  Trade  Journal; 
Taussig,  Some  Aspects  of  the  Tariff  Question,  Part  II  (Sugar);  Vogt,  The 
Sugar  Refining  Industry  in  the  United  States. 

*  Original  Petition  in  United  States  ».  American  Sugar  Refining  Company, 
p.  47.    Referred  to  hereafter  as  Original  Petition. 



thereupon  dissolved  them.  Upon  the  completion  of  this  series  of 
transactions,  the  American  Sugar  Refining  Company  became  a 
property  owning  trust,  as  distinct  from  a  holding  company  trust. 

The  American  Sugar  Refining  Company  operated  only  four 
refineries, — the  Standard  Sugar  refinery  at  Boston,  the  Matth- 
lessen  and  Weichers  refinery  at  Jersey  City,  the  Havemeyers  and 
Elder  refinery  at  Brookl)ai,  and  the  Louisiana  Sugar  refinery  at 
New  Orleans.  These  four  refineries  among  them  had  a  daily 
melting  capacity  of  about  70  per  cent  of  that  of  the  whole 
country.^  There  were  only  six  other  cane  sugar  refineries  in  the 
country,  and  one  of  these — the  Havemeyers  and  Elder  plant  in 
San  Francisco — ^was  for  all  practical  purposes  a  part  of  the  trust. 
The  owners  of  the  San  Francisco  plant  had  gone  into  the  "  trust" 
in  1888,  the  year  after  its  organization,  but  because  of  the 
opposition  of  the  state  of  California,  the  plant  had  been  trans- 
ferred to  Messrs.  H.  O.  Havemeyer,  T.  A.  Havemeyer,  and  C.  H. 
Senff,  members  of  the  board  of  trustees  of  the  Sugar  Refineries 
Company.  These  three  men  had  thenceforth  carried  on  the 
business  imder  the  name  of  Havemeyers  and  Elder,  but  always  in 
cooperation  with  the  Sugar  Refineries  Company,  and  its  suc- 
cessor, the  American  Sugar  Refining  Company.  Including  the 
output  of  this  San  Francisco  refinery,  as  is  only  proper,  the 
American  Sugar  Refining  Company  controlled  at  its  organiza- 
tion about  75  per  cent  of  the  country's  melting  capacity.* 

The  only  cane  sugar  refining  companies  outside  of  the  trust  in 
January,  1891,  were  the  California  Sugar  Refinery  at  San  Fran- 
cisco; the  Franklin  Sugar  Refining  Company,  the  E.  C.  Knight 
Company,  and  the  Delaware  Sugar  House,  all  located  at  Phila- 
delphia; and  the  Nash,  Spaulding  and  Company  at  Boston  (later 
known  as  the  Revere  Sugar  Refining  Company).  During  the 
course  of  the  year  1891  the  Spreckels  Sugar  Refining  Company 
began  the  operation  of  a  large  new  refinery  at  Philadelphia;  and 
the  Baltimore  Sugar  Refining  Company  had  under  construction 
a  refinery  in  Baltimore.  The  sugar  trust  set  out  to  overcome  all 
these  competitors,  and  by  1892  had  acquired  all  of  them  but  one. 

The  first  to  succumb  was  the  California  Sugar  Refinery  at 
I  Origmal  Petition,  p.  51.  *  Ibid.,  pp.  51-52. 


San  Francisco,  owned  by  Jchn  D.,  Adolph  B.,  and  Claus  Spreck- 
els.  In  March,  1891,  in  order  to  bring  to  an  end  the  competitive 
campaign  which  had  been  instituted  against  this  company  by  the 
firm  of  Havemeyers  and  Elder,  the  Spreckels  concern  entered 
into  an  agreement  with  the  firm  of  Havemeyers  and  Elder 
whereby  there  was  incorporated  the  Western  Sugar  Refining 
Company,  a  California  corporation,  half  of  the  stock  in  which 
was  taken  by  each  party.  The  newly  organized  corporation, 
in  accordance  with  the  provisions  of  the  agreement,  leased  for 
a  term  of  ten  years  both  the  Havemeyers  and  Elder  refinery  and 
the  Spreckels  refinery.^  Shortly  thereafter  the  Western  Sugar 
Refining  Company  permanently  closed  the  Havemeyers  and 
Elder  refinery,  and  its  former  owners  sold  their  plant  and  their 
half  interest  in  the  Western  Sugar  Refining  Company  to  the 
American  Sugar  Refining  Company.  The  factory  continued 
to  be  so  owned  (subject  to  lease)  until  1906,  when  it  was 
destroyed  by  fire;  and  the  stock  continued  to  be  owned  by 
the  American  Sugar  Refining  Company  until  191 1,  when, 
in  accordance  with  the  policy  of  the  new  management,  the 
American  Company  disposed  of  its  stock  to  the  Spreckels 
interests.  By  agreement  between  the  American  Sugar  Re- 
fining Company  and  the  Western  Company  the  territory  in 
which  each  was  to  sell  its  products  was  fixed,  and  also  the  prices 
at  which  sugar  was  to  be  sold.^ 

The  control  of  the  Baltimore  Sugar  Refining  Company  was 
effected  through  purchases  of  its  stock  in  1891  and  1892.  The 
factory  of  this  company  was  never  operated;  and  subsequently 
it  was  dismantled,  and  the  company  itself  dissolved.  The  pur- 
pose was  clearly  to  stifle  a  prospective  competitor.  Obviously 
no  economies  were  effected  through  the  closing  of  a  plant  that 
was  never  allowed  to  operate. 

In  March  and  April,  1892,  the  American  Sugar  Refining  Com- 
pany acquired  all  but  one  of  the  remaining  competitors.  Up  to 
March  of  this  year  competition  between  the  trust  and  the  inde- 
pendents (the  Franklin  Sugar  Refining  Company,  the  Spreckels 
Sugar  Refining  Company,  the  E.  C.  Knight  Company,  and  the 
^Original  Petitioo,  pp.  5^53-  'Ibid.,  p.  54. 


Delaware  Sugar  House)  had  been  severe,  and  the  price  of  sugar 
had  fallen  so  low  that  failure  confronted  some  of  these  com- 
panies. Relief  from  this  contingency  was  secured  by  selling  out 
to  the  trust, — the  capitalization  of  the  trust  being  increased  for 
this  purpose  from  $50,000,000  to  $75,000,000.  Shortly  after 
1892  the  American  Sugar  Refining  Company  consolidated  the 
Spreckels  refinery  and  the  Delaware  house  into  one;  and  the 
Franklin  and  Knight  refineries  into  one.  In  1897  the  Franklin 
Sugar  Refining  Company  closed  its  plant,  and  became  simply 
a  selling  agency  for  the  Spreckels  concern. 

By  April,  1892,  then,  the  first  period  of  competition  with  the 
trust  had  come  to  an  end.  The  struggle  had  been  severe,  but 
brief.  It  ended  in  the  purchase  by  the  American  Sugar  Refining 
Company  of  its  leading  competitors.  In  the  whole  country 
there  were  left  only  two  refineries  that  did  not  belong  to  the 
trust.  One  of  these  was  the  California  Sugar  Refinery,  leased 
to  the  Western  Sugar  Refining  Company,  half  of  the  stock 
of  which  was  held  by  the  trust;  and  the  other  was  the  small  re- 
finery in  Boston  owned  by  Nash,  Spaulding  and  Company, — a 
plant  which  the  trust  had  attempted  to  buy  in  1892,  but  without 
success.  The  American  Sugar  Refining  Company  produced  in 
1892,  including  the  output  of  the  California  Sugar  Refinery, 
substantially  controlled  by  it,  about  98  per  cent  of  the  country's 
output  of  refined  sugar.^ 

But  not  for  long  did  the  American  Sugar  Refining  Company 
maintain  its  well-nigh  complete  monopolistic  control  of  the  in- 
dustry. It  immediately  took  advantage  of  the  situation,  and 
advanced  the  price  of  refined  sugar  until  the  margin  between  the 
raw  and  refined  had  much  increased.*  Naturally  new  refineries 
were  built  in  order  to  profit  by  the  higher  prices;  in  fact  the 
history  of  the  trust  for  a  number  of  years  after  1892  was  one  of 
constant  endeavor  to  crush  or  to  bring  into  working  relations 
with  it  interests  that  would  not  sell  out. 

Already  in  1891  the  Mollenhauer  Sugar  Refining  Company 
had  been  incorporated;  and  soon  after  the  purchase  of  the  inde- 
pendent refineries  at  Philadelphia,  this  company  began  to  oper- 
*  Original  Petition,  p.  60.  *  Sec  p.  117. 


ate  its  plant  at  Brooklyn.  In  September,  1892, — only  a  few 
months  after  the  acquisition  by  the  sugar  trust  of  all  the  Phila- 
delphia refineries, — the  National  Sugar  Refining  Company  was 
organized.  In  October  of  the  same  year  the  W.  J.  McCahan 
Sugar  Refining  Company  was  chartered,  and  in  the  following 
year  started  to  refine  sugar.  To  hold  this  competition  within 
bounds  the  American  Sugar  Refining  Company  in  1893  ac- 
quired 30  per  cent  of  the  stock  of  the  Mollenhauer  concern;  * 
and  in  1894  it  succeeded  in  effecting  agreements  with  its  com- 
petitors looking  toward  a  limitation  of  the  output  and  the  fix- 
ing of  prices.^  In  1895  the  United  States  Sugar  Refining  Com- 
pany was  formed  for  the  purpose  of  constructing  a  sugar  refinery 
in  Camden,  New  Jersey  (just  across  the  river  from  Philadelphia). 
But  before  the  plant  was  ready  for  operation,  the  American 
Company  purchased  all  its  stock;  and  the  plant  was  never  com- 
pleted. In  1897  the  California  and  Hawaiian  Sugar  Refining 
Company  was  incorporated,  and  in  the  same  year  it  entered 
upon  the  refining  of  sugar  at  Crockett,  California.  This  con- 
cern refined  both  cane  and  beet  sugar.  Another  independent 
enterprise  estabUshed  in  1897  was  the  New  York  Sugar  Refin- 
ing Company,  fathered  by  Claus  Doscher,  a  capable  refiner 
who  had  disposed  of  his  property  to  the  trust  in  1887,  and  had 
•  given  up  the  business.  The  New  York  Sugar  Refining  Company 
was  formed  in  March,  1897,  and  its  refinery  was  completed 
toward  the  dose  of  1898.  Another  very  important  competitor 
was  Arbuckle  Brothers,  best  known  as  a  coffee  house.  This 
firm  owned  a  machine  used  for  filling,  packing,  and  weighing 
coffee, — a  machine  which  it  beUeved  could  also  be  profitably 
used  in  the  sugar  business.  In  1893,  therefore,  it  began  to 
buy  sugar  from  the  refineries,  and  to  put  it  up  in  packages  suit- 
able for  distribution  by  wholesale  grocers.  After  some  three  or 
four  years  the  firm  decided  that  it  would  build  a  refinery  of  its 
own;  and  by  the  middle  of  1898  the  plant  was  in  operation. 

Competition  was  thus  springing  up  on  all  sides,  and  it  was 
imperative  that  something  be  done,  unless  the  sugar  trust  was  to 

*  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2924. 

•  House  Report  no.  331,  62nd  Cong.,  2nd  Sess.,  p.  4. 


abandon  its  monopolistic  puqx)ses.  Accordingly,  in  September, 
iSgS,  the  American  Sugar  Refining  Company  appointed  a  com- 
mittee to  acquire  the  factories  of  any  and  all  independents,  this 
committee  being  authorized  to  pay  such  purchase  prices  as  it 
might  deem  fit.  In  order  to  facilitate  the  work  of  the  conmuttee, 
the  price  of  refined  sugar  was  much  reduced.  Mr.  Jarvie,  one  of 
the  partners  in  the  firm  of  Arbuckle  Brothers,  testified  before  the 
Industrial  Commission  that  when  his  company's  refinery  was 
completed  in  August  of  1898,  the  margin  ranged  from  80  to  90 
cents  per  hundred  pounds;  that  prices  were  first  cut  in  Septem- 
ber, and  that  this  price  cutting  continued  unremittedly  through- 
out the  spring  of  1899.^  At  the  date  of  his  testimony  (June, 
1899)  the  margin  was  51  cents  per  hundred  pounds  (which  was 
approximately  the  cost  of  refining),  and  the  margin  had  been  as 
low  as  32  cents,  which  was  20  to  30  cents  below  cost.*  As  a 
result  of  this  price  war  Arbuckle  Brothers  lost  a  great  deal  of 
money — approximately  a  million  and  a  quarter  dollars.*  An- 
other oflScer  of  the  Arbuckle  firm  testified  that  his  company  was 
hard  put  to  it  to  develop  its  business  because  the  wholesale 
grocers  in  some  localities  refused  to  distribute  the  goods  of 
competitors  of  the  American  Sugar  Refining  Company.*  This 
difficulty  was  obviated  in  Boston  by  Arbuckle  Brothers  dealing 
directly  with  the  retailers.  The  latter  were  given  sugar  at  the 
same  price  as  the  wholesalers,  irrespective  of  quantity;  and  even 
as  late  as  191 1  the  firm  still  dealt  directly  with  the  retailers  in 
that  city.^  A  special  retaliatory  measure  directed  against  the 
Arbuckle  firm  was  the  invasion  by  the  American  Sugar  Refining 
Company  of  the  coffee  business.  In  1896,  having  failed  in  an 
attempt  to  buy  the  patented  packing  machine  of  the  Arbuckle 
firm,  the  American  Sugar  Refining  Company,  through  Have- 
meyers  and  Elder,  purchased  a  large  interest  in  the  Woolson 

1  Industrial  Commission,  I,  p.  138. 

'Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  pp. 
^Ibid.,  p.  1 1 27. 


Spice  Company  of  Toledo,  at  a  cost  of  $1,150  per  share,  plus 
commissions.^  The  Woolson  Spice  Company  promptly  reduced 
the  price  of  coffee,  and  forced  the  Arbuckle  concern  to  do  like- 
wise. But  this  campaign  did  not  bring  about  the  desired  result. 
The  Arbuckle  Brothers  did  not  give  in,  and  they  are  still  in  the 
sugar  business.  Moreover,  the  American  Sugar  Refining  Com- 
pany deemed  it  advisable  subsequently  to  give  up  its  coffee 
business,  the  sale  of  this  business  being  reported  by  the  directors 
in  their  annual  report  to  the  stockholders  in  1909. 

The  remaining  competitors,  or  "  interlopers,"  as  Mr.  Have- 
meyer  called  them,  proved  more  tractable.  Through  the 
formation  in  May,  1900,  of  a  holding  company,  organized 
largely  by  individuals  dominant  in  the  management  of 
the  American  Sugar  Refining  Company,  the  other  refiners 
of  cane  sugar  were  brought  into  harmony  with  the  trust.* 
The  name  of  the  holding  company  was  the  National  Sugar 
Refining  Company  of  New  Jersey,  capitalized  at  $20,000,000, 
half  preferred  and  half  common.  The  National  Sugar  Re- 
fining Company  of  New  Jersey  acquired  the  entire  capital 
stock  of  the  MoUenhauer  Sugar  Refining  Company,  the  Na- 
tional Sugar  Refining  Company,  and  the  New  York  Sugar 
Refining  Company  (also  its  entire  bond  issue),  giving  in  exchange 
therefor  $8,250,000  of  its  own  preferred  stock.  Most  of  the 
balance  of  the  preferred  stock  was  used  to  buy  25  per  cent  of  the 
stock  of  the  McCahan  Sugar  Refining  Company.  The  National 
Sugar  Refining  Company  of  New  Jersey  continued  to  hold  the 
stocks  and  bonds  of  these  companies,  and  managed  their  affairs 
in  harmony.  The  common  stock  of  the  National  Sugar  Refining 
Company  of  New  Jersey  ($10,000,000)  was  given  to  Mr.  H.  O. 
Havemeyer,  the  president  of  the  American  Sugar  Refining 
Company,  as  promoters*  profit.'     Mr.  Havemeyer  thereupon 

*  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2932, 
and  Lexow  Report,  pp.  80,  133. 

'In  the  case  of  the  California  and  Hawaiian  Sugar  Refining  Company 
cooperative  relations  were  not  established  until  1903. 

■  Original  Petition,  p.  75,  and  Hearings  on  the  American  Sugar  Refining 
Company,  1911-1912,  p.  483. 

\  \  \ 


delivered  this  stock  to  himself  and  to  Mr.  L.  M.  Palmer,  both  of 
them  directors  in  the  American  Sugar  Refining  Company,  as 
trustees  under  a  voting  trust  for  five  years,  the  beneficiaries 
being  Mr.  Havemeyer,  Mr.  Palmer,  Mr.  W.  B.  Thomas,  Mr.  J. 
E.  Parsons,  and  Mr.  J.  H.  Post,  all  of  them,  with  one  exception 
possibly,  officers  in  the  American  Sugar  Refining  Company.^  As 
part  of  this  same  set  of  transaotions,  the  American  Sugar  Refin- 
ing Company  on  its  own  account  acquired  $5,128,000  of  the 
preferred  stock  of  the  National  Sugar  Refining  Company  of  New 
Jersey.  (This  included  the  $900,000  of  preferred  stock  in  this 
company  received  by  the  American  Sugar  Refining  Company  in 
exchange  for  the  MoUenhauer  stock  acquired  by  it  in  1893.)  The 
American  Sugar  Refining  Company  therefore,  either  directly  or 
through  its  officers,  held  three-fourths  of  the  stock  of  the  newly 
organized  holding  company;  and  as  a  natural  result  competition 
between  these  concerns  was  eliminated,  except  such  competition 
as  resulted  from  Mr.  Havemeyer's  general  policy  of  promoting 
competition  for  business  among  the  several  plants.  A  suit  to 
invalidate  the  issue  of  the  common  stock  on  the  ground  that  it 
was  made  without  any  consideration  and  contrary  to  the  laws  of 
New  Jersey,  was  filed  in  1911.  Mr.  Horace  Havemeyer,  a  son  of 
the  former  head  of  the  American  Sugar  Refining  Company,  in  tes- 
timony before  an  investigating  committee  implied  that  this  suit 
was  brought  because  he  (the  son)  had  resigned  from  the  direc- 
torate of  the  American  Sugar  Refining  Company,  and  proposed  to 
make  the  National  Sugar  Refining  Company  a  real  competitor.^ 
As  the  result  of  this  proceeding  the  common  stock  was  cancelled, 
and  the  American  Sugar  Refining  Company,  owning  the  major- 
ity of  the  preferred  stock,  came  into  direct  control  of  the  com- 
pany. Subsequently  it  offered  to  its  own  shareholders  the  right 
to  subscribe  at  par  for  $5,000,000  of  its  $5,128,200  stock  in  the 
National  Company.  Many  of  them  refused  to  make  the  ex- 
change; and  the  American  Company  thus  continued  to  hold 
nearly  one-fourth  of  the  stock  in  its  own  treasury. 

*  Original  Petition,  p.  76. 

'Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  pp. 



By  1900,  competition,  though  not  eliminated,  was  clearly  held 
within  bounds.  The  natural  consequence  was  an  advance  in  the 
price  of  refined  sugar.^  This,  in  turn,  soon  led  to  the  building  of 
competing  refineries.  Among  the  new  enterprises  established 
were  the  Federal  Sugar  Refining  Company,  the  Warner  Sugar 
Refining  Company,  the  Colonial  Sugars  Company,  and  the 
Cunningham  Sugar  Refining  Company. 

The  American  Sugar  Refining  Company,  for  its  part,  con- 
tinued active  in  the  attempt  to  eliminate  competition.  In 
1903  the  Western  Sugar  Refining  Company,  in  order  to  drive 
out  of  business  the  California  and  Hawaiian  Sugar  Refining  Com- 
pany (its  only  rival  for  the  Pacific  Coast  trade),  swamped  the 
markets  of  the  latter  with  refined  sugar  sold  below  the  cost 
of  production,  with  consequent  financial  loss  for  the  smaller 
concern.^  Confronted  with  bankruptcy,  the  California  and 
Hawaiian  Sugar  Refining  Company  agreed  in  1903  that  for  a 
period  of  three  years  it  would  not  manufacture  or  sell  any  refined 
cane  sugar,  and  that  it  would  permit  its  beet  sugar  output  to  be 
marketed  by  the  Western  Sugar  Refining  Company.'  During 
the  life  of  the  agreement,  the  California  and  Hawaiian  c<mcem 
refined  no  sugar  of  any  kind,  either  from  cane  sugar  or  from 
sugar  beets;  but  it  was  paid  the  sum  of  $200,000  a  year,  this  pay- 
ment being  clearly  for  the  purpose  of  restraining  its  competition. 

In  1904,  also,  the  American  Sugar  Refining  Company  put  an 
end  to  the  proposed  competition  of  the  Pennsylvania  Sugar 
Refining  Company.^  This  concern  had  been  organized  in  1883, 
with  a  capital  of  $100,000.  In  1903  its  authorized  capital  was  in- 
creased to  $5,000,000,  and  the  company  was  nearly  ready  to  begin 
operating  a  newly  erected  refinery.  A  majority  of  the  stock 
of  the  Pennsylvania  Sugar  Refining  Company  (26,000  shares  out 
of  50,000)  was  held  by  the  Champion  Construction  Company, 
which,  in  turn,  was  controlled  by  Mr.  Adolph  Segal.  The  Con- 
struction Company,  under  contract,  was  building  and  equip- 

*  See  p.  117. 

•Original  Petition,  p.  81. 

*  On  this  episode  see  Ori^al  Petition,  pp.  82-88. 

1    ,  J  ■.      J        '  ' 


ping  the  Pennsylvania  Sugar  Refinery,  and  it  was  also  building 
a  large  apartment  house  in  Philadelphia.  It  was  thus  in  need 
of  funds.  Aware  of  these  facts,  Mr.  Gustav  E.  Kissel,  an  officer 
and  director  of  the  American  Sugar  Refining  Company,  acting 
for  the  company,  lent  Mr.  Segal  the  simi  of  $1,250,000  on  a  one- 
year  note  dated  January  4, 1904.  As  security  for  the  payment  of 
the  note  when  due,  Mr.  Segal  transferred  to  Mr.  Kissel  26,000 
shares  and  $500,000  in  bonds  of  the  Pennsylvania  Sugar  Refining 
Company,  together  with  written  authority  to  vote  the  stock,  the 
Champion  Construction  Company  having  given  its  consent  to  this 
transaction.  The  petition  of  the  government  charged  that  Mr. 
Segal  was  not  aware  that  the  American  Sugar  Refining  Company 
was  the  real  lender  of  the  money,  and  that  he  had  no  reason  to 
believe  that  the  lender  had  any  ulterior  purpose.  But  Mr. 
Kissel,  controlling,  as  he  did,  the  Pennsylvania  Sugar  Refining 
Company,  caused  four  of  the  seven  directors  to  resign,  and  him- 
self and  three  others  to  be  elected  in  their  stead.  Thereupon  they 
had  spread  upon  the  minutes  a  resolution  that  the  refinery  be 
closed.  Having  prevented  the  operation  of  the  refinery,  which 
would  probably  have  put  Mr.  Segal  in  funds  with  which  to  meet 
the  note,  Mr.  Kissel  and  the  officials  of  the  American  Sugar 
Refining  Company  succeeded  during  the  years  1904,  1905,  and 
1906 — the  petition  relates — ^in  so  involving  Mr.  Segal  in  business 
complications,  and  in  so  embarrassing  him,  that  he  found  him- 
self unable  to  pay  even  the  interest  on  his  note;  and  until  1909 
the  note  remained  impaid  and  the  refinery  idle. 

Because  of  this  transaction  the  receiver  of  the  Pennsylvania 
Sugar  Refining  Company  brought  suit  against  the  American 
Sugar  Refining  Company  under  the  Sherman  law  for  treble  dam- 
ages. The  American  Company  finally  settled  by  paying  $750,- 
000  in  cash,  and  returning  the  securities.^  The  American 
Company  never  got  back  the  principal  of  the  loan,  hence  the 
transaction  cost  it  $2,000,000.  Counsel  for  the  American  Com- 
pany testified  that  the  settlement  was  made  because  the  suit 
was  instituted  at  about  the  time  of  the  underweighing  cases, 

^Hearings    on    the   American    Sugar    Refining    Company,    1911-1912, 
p.  220. 


and  the  feeling  against  the  American  Company  was  so  strong 
that  the  trial  would  have  proven  a  farce. 

In  1908,  another  independent  concern,  the  Colonial  Sugars 
Company,  operating  a  small  refinery  in  Louisiana,  was  acquired 
by  the  Cuban-American  Sugar  Company.  The  latter  concern 
was  a  combination  of  several  raw  sugar  producing  companies  in 
Cuba,  and  according  to  the  government  petition  was  operated  in 
harmony  with  the  American  Sugar  Refining  Company,  the 
latter  having,  in  fact,  lent  it  large  sums  of  money,  and  having  in 
other  ways  dominated  its  affairs.* 

This  left  as  independent  cane  sugar  refineries  only  Arbuckle 
Brothers,  the  Federal  Sugar  Refining  Company,  the  Warner 
Sugar  Refining  Company,^  the  Revere  Sugar  Refining  Company, 
the  Cunningham  Sugar  Refining  Company,  and  two  individual 
plants,  one  of  which  in  1909  was  not  in  operation. 

We  turn  now  to  the  beet  sugar  industry,  and  to  the  attempt  of 
the  American  Sugar  Refining  Company  to  duplicate  here  the 
considerable  degree  of  success  attained  in  the  cane  sugar 

The  beet  sugar  industry  in  this  country  is  comparatively  new. 
Prior  to  1898  the  production  of  refined  sugar  from  domestic 
beets  hardly  exceeded  in  any  year  2  per  cent  of  the  country's  out- 
put of  refined  sugar.  Under  the  protection  afforded  by  the 
Dingley  tariff  of  1897,  however,  the  industry  developed  rapidly. 
In  1901, 7  per  cent  of  the  sugar  consimied  was  beet  sugar;  in  1909, 
14  per  cent.' 

Up  to  1901  the  American  Sugar  Refining  Company  had  had 
little  to  do  with  the  beet  sugar  industry.  In  1897  it  had  pur- 
chased from  the  Spreckels  family  a  one-half  interest  in  the  West- 
em  Beet  Sugar  Company, — a  company  incorporated  in  1887,  and 
possessing  a  factory  in  California.  In  the  same  year  (1897)  the 
two  interests  had  incorporated  the  Spreckels  Sugar  Refining 

*  Original  Petition,  pp.  88-89. 

'  These  three  companies  refined  in  1909  some  8.70,  6.30  and  2.50  per  cent, 
respectively,  of  the  country's  output.  Hearings  on  the  American  Sugar 
Refining  Company,  1911-1912,  p.  43. 

•Original  Petition,  p.  93. 


Company,  which  was  to  build  a  new  factory  in  the  same  state. 
The  following  year  this  newly  organized  company  acquired  all 
of  the  stock  of  the  Western  Beet  Sugar  Company,  and  perma- 
nently dosed  the  factory.  The  Spreckels  Sugar  Company  after 
its  organization  sold  all  its  product  through  the  Western  Sugar 
Refining  Company,  one-half  of  the  stock  in  which,  as  we  have 
seen,  was  owned  by  the  American  Sugar  Refining  Company.  A 
half-interest  in  one  concern  represented,  therefore,  the  American 
Sugar  Refining  Company's  total  investment  in  the  beet  sugar 
business  up  to  1901. 

The  beet  sugar  industry,  however,  was  steadily  growing  "^in 
importance,  and  in  some  localities  was  becoming  a  serious  com- 
petitor of  cane  sugar.  By  1901  there  were  thirty^one  separate 
concerns  manufacturing  beet  sugar,  and  eight  others  were  plan- 
ning to  enter  the  business.^  The  American  Sugar  Refining  Com- 
pany apparently  came  to  the  conclusion  that  it  must  eliminate 
this  growing  competition.  Having  obtained  the  necessary  funds 
by  an  increase  in  its  capital  stock  from  $75,000,000  to  $90,000,- 
000,  the  company  in  the  summer  of  1901  manufactured  an  un- 
usually large  quantity  of  refined  sugar  for  the  purpose,  so  the 
government  petition  alleged,  of  selling  it  in  the  markets  of  its 
rivals.*  About  the  same  time  Mr.  H.  O.  Havemeyer  and  Mr.  L. 
M.  Palmer  entered  into  unlawful  agreements  with  various  rail- 
roads leading  out  of  Boston,  New  York,  Jersey  City,  Philadel- 
phia, and  New  Orleans,  for  the  transportation  at  rates  much  be- 
low the  published  tariffs  of  large  quantities  of  refined  sugar,  and 
for  the  free  storage  of  this  sugar  in  warehouses  belonging  to  the 
railroads.'  The  amount  of  rebates  paid  to  the  American  Sugar 
Refining  Company  during  the  years  1901-1904  totalled  $500,000.* 
The  next  step  was  the  sale  of  this  sugar  in  the  markets  of  the 
beet  sugar  companies  at  prices  below  the  cost  of  production.* 
This  move  forced  the  beet  sugar  refineries  to  sell  out  to  the  Amer- 
ican Sugar  Refining  Company  or  face  the  prospect  of  ruin;  and 
many  of  them  decided  to  sell. 

*  Original  Petition,  p.  96.  *  Ibid.,  pp.  9^-99. 

'  Ibid.,  pp.  97-98.  *  Ibid.,  p.  99. 

» Ibid. 


The  most  important  concern  over  which  control  was  secured 
was  the  American  Beet  Sugar  Company.  This  concern,  with  a 
capital  of  $20,000,000,  was  the  leading  beet  sugar  enterprise  in 
the  country;  it  had  five  plants,  and  was  steadily  increasing  its 
business.  The  American  Sugar  Refining  Company  and  the 
American  Beet  Sugar  Company  entered  in  1902  into  a  ten-year 
contract  whereby  the  former  was  to  become  the  supervising  agent 
for  the  disposal  of  the  product  of  the  latter  at  a  commission  of 
one-quarter  of  a  cent  per  pound.^  The  American  Sugar  Refining 
Company  agreed  during  the  beet  sugar  season, — ^beet  sugar  comes 
on  the  market  only  during  a  limited  period  following  the  matur- 
ing of  the  beet  sugar  plant, — ^not  to  sell  sugar  in  the  markets  of 
the  American  Beet  Sugar  Company  except  at  its  regular  open 
price  at  the  point  of  production,  plus  freight.  This  clause  was 
inserted,  according  to  the  vice  president  of  the  Beet  Sugar  Com- 
pany, to  prevent  local  price  cutting  by  the  trust.^  A  drop  in  the 
price  of  refined  sugar  at  the  Missouri  River  from  5  cents  to  3^ 
cents  in  one  day  was  not  competition,  in  his  opinion,  but  war- 
fare. Atabout  the  same  time  the  American  Sugar  Refining  Com- 
pany acquired  $7,500,000  of  the  Beet  Sugar  Company's  stock. 
The  agreement  remained  in  force  until  1907,  and  the  stock  con- 
tinued to  be  held  until  1907  or  later;  but  after  1909  the  two  com- 
panies do  not  seem  to  have  acted  in  cooperation.'  The  pres- 
ident of  the  American  Beet  Sugar  Company  testified  that  the 
agre^ent  was  abrogated  on  the  recommendation  of  counsel,  who 
adnsed  that  the  contract,  if  not  cancelled,  would  land  the 
ijarties  thereto  in  the  penitentiary.* 
/  Several  other  companies  were  acquired  by  the  sugar  trust  in 
^^  the  years  that  followed;  but  we  need  not  go  into  the  details.^ 
Suflice  it  to  say  that  at  high-water  mark  the  American  Sugar 
Refining  Company  had  about  $35,000,000  in  beet  sugar 
companies,  not  including  the  very  large  personal  interest  of  the 

*  Original  Petition,  p.  loi. 

'Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  389. 
•Original  Petition,  p.  102. 

*  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  391. 
^They  may  be  found  in  Original  Petition,  pp.  103-132. 


various  officials  of  the  company — the  Havemeyer  estate,  for  ex- 
ample, in  191 1  had  about  $10,000,000  of  stock  in  beet  sugar  com- 
panies.^ Of  the  $35,000,000,  approximately  $12,000,000  was 
subsequently  disposed  of,  some  during  Mr.  Havemeyer's  life,  but 
most  of  it  after  his  death.  Yet  even  as  late  as  191 1  the  company 
had  a  majority  interest  in  two  beet  sugar  factories,  and  a  min- 
ority interest  in  thirty-one.^  The  total  number  of  beet  sugar  fac- 
tories in  the  coimtry  was  68.'  The  trust,  therefore,  had  some 
interest  in  approximately  one-half  of  the  factories,  and  presum- 
ably on  the  whole  the  more  important  ones. 

Having  traced  briefly  the  history  of  the  American  Sugar 
Refining  Company's  attempt  to  control  the  sugar  industry,  we 
may  next  inquire  in  more  detail  into  the  success  of  its  endeavors. 
To  do  this  with  any  degree  of  completeness  is  difficult;  full 
figures,  except  for  recent  years,  are  not  available.  Nevertheless 
it  is  certain  that  the  company  at  one  time  did  succeed  in  effect- 
ing practically  a  complete  monopoly,  and  that  subsequently  it 
lost  ground  materially.  It  is  probable  that  it  does  not  now 
control  enough  of  the  business  to  be  considered  a  trust* 

The  Sugar  Refineries  Company  (the  trustee  device)  produced 
in  1887  about  78  per  cent  of  the  country's  output  of  refined 
sugar.^  The  next  year,  after  the  acquisition  of  a  leading  com- 
petitor, its  proportion  increased  to  about  82  per  cent.  The 
American  Sugar  Refining  Company  upon  its  organization  in 
1891 — taking  the  place  of  the  former  "trust" — controlled  about 
75  per  cent  of  the  refining  capacity  of  the  •coimtry.*  In  1892 
every  competitor  in  the  country  except  one  was  acquired,  and 
as  a  result  the  company  produced  98  per  cent  of  the  country^s 
output  of  cane  sugar, — the  output  of  beet  sugar  was  a  negligible 
factor  at  that  time.  This  represented  the  high-water  mark. 
During  the  three  years  1907-1909,  the  American  Sugar  Refining 

>  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  pp.  559, 
'Ibid.,  p.  42. 
'  Ibid.,  p.  40. 

^Original  Petition,  pp.  38-40. 
*  See  p.  93. 


Company  and  its  affiliated  concerns  made,  according  to  the  peti- 
tion of  the  government,  only  about  72  per  cent  of  all  the  refined 
sugar  consumed  in  the  United  States  not  produced  from  domestic 
beets;  and  in  1909  about  70  per  cent  of  the  total  output  of  re- 
fined sugar,  cane  and  beet.^  The  government  in  bringing  a 
dissolution  suit  would  not  be  likely  to  underestimate  the  control, 
hence  it  is  reasonably  certain  that  the  sugar  trust  had  lost 
ground.  If  we  may  accept  figures  presented  by  the  American 
Sugar  Refining  Company,  before  a  congressional  investigating 
committee,  to  prove  that  the  company  was  not  an  illegal  com- 
bination, the  company  has  been  unsuccessful  in  its  attempt  to 
control  the  industry.  These  figures  are  shown  in  the  table  below.' 


OP  Refined  Sugar 

IN  THE  United  States,  i  900-1910 



Total  quanUty 

refined,    Barrds. 

000  omitted 

Quantity  refined 

by  American 

Sugar  Refining  Co. 


000  omitted 

Per  cent  refined 

by  American 

Sugar  Refining  Co. 










•  57-90 



Ay%«w  ......... 



1902 ......... 













This  table,  prepared  by  Willett  and  Gray,  would  seem  to 
show  that  the  American  Sugar  Refining  Company,  at  the  time 
when  the  government  brought  its  dissolution  suit  (November, 
1910),  no  longer  possessed  monopolistic  control.  While  in  1900 
it  produced  67.30  per  cent  (about  two-thirds)  of  the  total  quan- 
tity of  sugar  refined  in  this  country,  by  1910  it  was  producing 

*  Original  Petition,  pp.  139,  142. 

*  Hearings  on  the  American  Sugar  Refining  Company,  191 1-191 2,  p.  43. 


only  42  per  cent.  But  these  figures  hardly  portray  the  real 
situation.  While  the  table  may  be  accepted  as  representing 
truthfully  the  actiial  production  of  the  American  Sugar  Refining 
Company,  it  does  not  show  the  degree  of  control  exercised  by  it. 
For  instance,  in  the  production  of  the  company  there  is  included 
one-half  of  the  output  of  the  Western  Sugar  Refining  Company, 
in  which  the  American  Sugar  Refining  Company  had  a  one-half 
interest^  But  to  consider  the  other  half  as  competitive  would  be 
unwarranted.  The  Western  Sugar  Refining  Company  and  the 
American  Sugar  Refining  Company  worked  together  in  such 
harmony  that  the  total  output  of  the  Western  Company  might 
properly  be  considered  as  being  controlled  by  the  American 
Company.  Adding  the  other  half  of  the  Western  Com- 
pany's output  we  get  43.38  per  cent  in  1910,  instead  of  42.14  per 
cent.^  Again,  the  American  Sugar  Refining  Company  had  about 
one-quarter  interest  in  the  National  Sugar  Refining  Company; 
and  the  Havemeyer  estate  held  approximately  a  one-half  interest. 
Up  to  191 1  the  Havemeyers — the  only  son  of  Mr.  H.  O.  Have- 
meyer was  a  director  of  the  American  Company  imtil  January, 
191 1 — ^worked  in  harmony  with  the  American  Sugar  Refining 
Company,  and  therefore  the  output  of  the  National  Company 
could  hardly  be  classed  as  independent.*  The  output  of  the 
National  Company  in  1910  was  1 1.40  per  cent  of  the  total,^  which 
being  added  to  the  figure  of  43.38  per  cent  would  raise  the  per- 
centage of  the  American  Sugar  Refining  Company  to  54.78. 
Finally,  the  American  Sugar  Refining  Company  had  in  1910  an 
interest  in  eleven  beet  sugar  companies,  refining  7.43  per  cent 
of  the  coimtry's  output  of  sugar.*  Were  we  to  include  the  pro- 
duction of  these  concerns,  the  American  Sugar  Refining  Com- 
pany controlled  in  1910, — the  year  in  which  the  government 
brought  its  suit, — 62.21  per  cent  of  the  total  output.*    Whether 

^  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  43. 

*  IWd.,  p.  57. 

*  See  p.  98. 

*  Hearings  on  the  American  Sugar  Refining  Company,  191 1-1912,  p.  58. 
»IbkL,  p.  58. 

*This  includes  none  of  the  output  of  the  McCahan  Sugar  Refining  Com- 
pany (producing  about  3.0  per  cent  of  the  total  output),  one-fourth  of  the 


this  was  sufficient  to  enable  it  to  dominate  the  industry  is  open 
to  question.  Yet  it  is  clear  that  the  sugar  trust  was  not  able  to 
maintain  its  position  against  the  independent  refiners,  in  ^ite 
of  the  fact  that  it  assimilated  from  time  to  time  its  more  vigorous 
competitors.  Moreover,  by  1919  the  proportion  of  the  American 
Sugar  Refining  Company,  as  calculated  by  Willett  and  Gray, 
had  fallen  to  27.02  per  cent,  as  compared  with  42.14  per  cent  in 
1910.'  What  does  this  indicate  as  to  the  economies  of  the  trust 
form  of  organization? 

As  usual,  it  is  difficult  to  obtain  information  as  to  the  nature 
and  importance  of  the  economies  effected  by  the  establishment 
of  a  trust.  Mr.  Havemeyer,  when  asked  by  the  Industrial 
Conmiission  as  to  the  advantages  that  resulted  from  the  organi- 
zation of  the  sugar  trust,  replied  that  the  greatest  advantage  lay 
in  working  the  refineries  full  and  uninterruptedly.  We  may  quote 
from  his  testimony.  "If  you  have  a  capacity  of  140,000,000 
and  can  only  melt  100,000,000  somebody  has  got  to  cut  down 
materially.  The  moment  you  cut  down  you  increase  the 
cost;  by  buying  up  all  the  refineries,  burning  them  up,  and 
concentrating  the  meltings  in  four  refineries  and  working  them 
f  uU,  you  work  at  a  minimimi  cost.  .  .  . 

"Q.  So  the  chief  advantage  in  the  combination  was  in  con- 
centrating the  production  and  destro)dng  the  poor  refineries? 

"A.  Precisely."  ^ 

The  demand  for  sugar  varies,  of  coiu-se,  from  time  to  time, 
and  the  American  Sugar  Refining  Company  realized  a  further 
gain  through  its  practice  of  adjusting  the  supply  of  sugar  to  the 
demand  by  its  use  of  the  Brooklyn  refinery.  The  refineries  at 
Boston,  Jersey  City,  Philadelphia,  and  New  Orleans'  were  run 
to  their  full  capacity  practically  all  of  the  time,  while  the  output 

stock  of  which  was  held  by  the  National  Sugar  Refining  Company  of  New 
Jersey.    Hearings  on  the  American  Sugar  Refining  Company,  1911-1912, 

P-  43- 

*  See  Annual  Report  of  the  American  Sugar  Refining  Company,  1919,  p.  23. 

*  Industrial  Conunission,  I,  pp.  109-110. 

■  The  necessity  of  importing  raw  sugar  has  influenced  the  establishment  of 
refineries  at  Boston,  New  York,  Jersey  City,  Philadelphia,  Baltimore,  New 
Orleans,  and  San  Francisco. 


of  the  Brooklyn  refinery  was  made  to  fluctuate  according  to  the 
state  of  the  market.  By  this  arrangement  the  loss  resulting  from 
a  partial  output  was  concentrated  on  one  plant,  especially 
designed  for  the  purpose.  It  has  been  estimated  that  the  Ameri- 
can Sugar  Refining  Company  through  this  device  effected  a 
saving  at  times  of  as  much  as  one-eighth  of  a  cent  per  pound. 
Obviously  this  represents  an  advantage  only  when  the  demand 
for  sugar  is  so  small  that  all  the  plants  can  not  be  operated  at 

According  to  Mr.  Havemeyer  the  bringing  of  a  nimiber  of  men 
into  a  combination  was  also  advantageous  in  promoting  im- 
provements and  more  skilful  methods;  for  each  man  absorbed 
ideas  from  the  others.*  The  saving  in  the  cost  of  superintend- 
ence, in  his  opinion,  was  inappreciable. 

The  trust  also  had  an  advantage,  perhaps,  in  handling  labor 
difficulties.  A  strike  declared  at  the  Brooklyn  refinery  in  the 
summer  of  1910  was  defeated,  largely  because  the  American 
Company,  having  two  refineries  in  reserve,  was  able  to  supply 
the  demand  for  sugar  without  operating  the  plant  at  which 
the  strike  occurred.* 

In  spite  of  these  advantages,  and  perhaps  others,  the  inde- 
pendent refiners  have  stated  most  emphatically  their  belief  that 
they  could  make  sugar  as  cheaply  as  the  American  Sugar  Refin- 
ing Company.  Mr.  Jarvie,  a  partner  of  the  firm  of  Arbuckle 
Brothers,  testified  before  the  Industrial  CoDMnission  that  his 
refinery  was  large  enough  and  well  enough  equipped  to  secure 
the  advantages  of  the  division  of  labor  as  completely  as  the 
American  Sugar  Refining  Company;  and  that  the  latter  could 
not  refine  and  sell  sugar  more  cheaply  than  his  firm.'  Mr. 
Arbuckle  testified  in  1911  as  follows:  "We  claimed,  and  I  believe 
the  trade  claimed,  that  we  had  the  most  economical  refinery  in 
the  coxmtry,  and  that  we  could  refine  sugar  as  cheap,  if  not 
cheaper,  than  any  of  them."  *   Mr.  Gilmore,  of  the  same  con- 

*  Industrial  Commission,  I,  p.  no. 

*  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2994. 
'  Industrial  Conunis^on,  I,  p.  139. 

*  Hearings  on  the  American  Sugar  Refining  Company,  1911-19x2,  p.  2318. 


cem,  testified  that  his  firm  after  considerable  experimentation  had 
found  an  output  of  7,500  barrels  a  day  to  be  the  most  economic 
unit.^  When  asked  whether  a  sugar  refinery  had  to  be  enor- 
mously large  to  refine  economically,  he  replied  that  that  was  not 
his  experience.  The  plant  might  be  too  large;  and  thus  be 
cumbersome.  An  output  of  20,006  barrels,  for  example,  would 
not,  in  his  opinion,  show  any  economy  over  7,500  barrels.  Fur- 
thermore, it  did  not  require  a  combination  of  refineries  to  manu- 
facture sugar  economically. 

The  foregoing  testimony  of  the  independents  is  not  regarded 
as  proof  of  the  inabiUty  of  the  American  Sugar  Refining  Com- 
pany to  produce  more  cheaply  than  its  smaller  rivals.  The 
company,  for  its  part,  claims  just  the  opposite.  In  the  Annual 
Report  for  1909,  for  example,  the  company,  referring  to  the  fact 
that  the  new  refinery  at  Chalmette,  Louisiana  (near  New  Or- 
leans) was  equipped  with  the  latest  labor-saving  machinery, 
stated  that  it  was  expected  that  sugar  could  be  refined  more 
cheaply  at  this  refinery  than  at  any  other  in  the  country.*  The 
relative  economy  of  single  plants  and  combined  plants  thus 
appears  to  be  a  matter  upon  which  the  disinterested  investigator 
can  as  yet  do  little  but  speculate. 

Such  monopolistic  control  as  the  American  Sugar  Refining 
Company  had  at  the  date  of  the  government  dissolution  suit 
(1910)  was  not  the  result  of  its  ownership  of  the  principal  raw 
material.  The  acting  president  of  the  company  introduced  as 
part  of  his  testimony  before  a  congressional  investigating  com- 
mittee* a  statement  of  the  company  to  the  eflFect  that  it  owned 
no  cane  sugar  lands,  and  was  not  interested  directly  or  in- 
directly in  such  lands.'  A  few  officials  of  the  company,  includ- 
ing the  acting  president,  then  owned  sugar  lands  in  Cuba, 
but  the  testimony  was  that  this  sugar  was  sold  to  the  highest 
bidder.  Of  course,  the  fact  that  the  American  Sugar  Refining 
Company  was  such  a  large  buyer  of  raw  sugar  gave  it  some 

^Hearings   on    the    American    Sugar    Refining    Company,    1911-1912, 
pp.  1151-1152. 
*  Ibid.,  p.  2991. 
'  Ibid.,  p.  40. 


control  over  the  price,  but  this  is  quite  different  from  the  estab- 
lishment of  a  monopoly  through  the  actual  ownership  of  the 
supply  itself. 

Neither  was  the  American  Sugar  Refining  Company's  power 
the  result  of  patent  rights.  The  company  does  not  appear  to 
have  derived  any  special  advantage  through  the  control  of 
patented  machinery. 

To  what,  then,  may  we  ascribe  its  more  or  less  dominant 

The  record  of  the  trust's  relations  with  the  federal  govern- 
ment is  not  one  of  which  it  can  be  proud.  The  trust  has  been 
a  noted  recipient  of  tariff  favors.  Without  venturing  to  discuss 
the  merits  of  the  protective  system,  it  may  be  said  that  the 
sugar  duties  for  many  years  have  been  arranged  without  refer- 
ence to  any  legitimate  protective  principle.  The  differential 
on  refined  sugar  under  the  act  of  1883,  for  example,  was  con- 
siderably greater  than  the  total  cost  of  refining,  and  this  virtu- 
ally prevented  the  importation  of  refined  sugar.^  The  prohibi- 
tory duty  undoubtedly  promoted  the  establishment  of  the  trust 
in  1887,  and  enabled  it  to  make  enormous  profits.  In  the  act  of 
1890  raw  sugar  was  admitted  free  (a  bounty  being  given  to 
domestic  producers),  but  the  differential  on  refined  was  still 
high  enough  to  shut  out  foreign  competition,*  and  therefore  to 
facilitate  the  charging  of  monopoly  prices,  especially  upon  the 
practical  elimination  of  domestic  competition  in  1892.  Hosti- 
lity toward  the  sugar  trust  became  intense  during  the  early 
nineties,  and  for  a  time  bade  fair  to  lead  to  the  entire  removal 
of  the  duty  on  sugar,  both  raw  and  refined,  in  the  Wilson  tariff 
act  of  1894.  Yet  it  is  a  matter  of  history  that  from  this  struggle 
the  trust  emerged  the  victor.*  Duties  were  somewhat  reduced, 
but  they  were  still  more  than  ample.  From  1894  down  to  the 
enactment  of  the  Simmons-Underwood  bill  of  1913,  the  duties 
on  sugar  restrained  foreign  competition,  and  thus  made  it  easier 

^Taussig,  Some  Aspects  of  the  Tariff  Question,  pp.  103-104. 

•  Ibid.,  p.  106. 

•  Sec  Taussig,  Tariff  History  of  the  United  States,  fifth  edition,  pp.  305- 




for  the  trust  to  maintain  monopoly  prices.    Mr.  Havemeyer, 

the  head  of  the  sugar  trust  \mtil  his  death  in  1907,  stated  before 
the  Industrial  Commission  that  "  the  mother  of  all  trusts  is  the 
customs  tariff  bill. "  ^  Though  this  is  certainly  not  the  whole 
truth, — the  causes  of  trusts  lie  deeper  than  this, — ^it  is  true  that 
the  tariff  greatly  facilitated  the  establishment  of  monopoly  con- 
ditions in  this  industry.  And  no  one  realized  this  better  than 
Mr.  Havemeyer.  The  removal  of  the  tariff  on  refined  sugar,  he 
testified,  "would  kill  the  sugar  industry."^  .  .  .  "It  would  inflict 
a  terrible  and  infamous  wrong  upon  100,000  people  dependent 
upon  it."  ...  "It  would  permit  America  to  be  the  dumping 
ground  of  all  the  beet  sugars  of  Germany,  Austria,  France,  and 
Russia."  Such  action  would  represent  "merely  truckling  to  a 
miserable  clamor — a,  bugaboo — this  babble  about  trusts."* 
While  the  tariff  was  held  to  be  the  mother  of  trusts,  Mr.  Have- 
meyer made  one  exception,  and  that  exception  was  the  sugar 
refining  industry.^* 

Of  recent  years  the  situation  in  this  regard  has  improved. 
The  management  of  the  sugar  trust  has  changed  for  the  better, 
and  little  is  heard  of  attempts  to  dictate  tariff  legislation.  More- 
over, the  sugar  refiners  seem  to  have  imdergone  a  change  of 
heart  with  respect  to  the  tariff  on  sugar.  A  high  duty  on  raw 
sugar  makes  the  growing  of  sugar  beets  more  profitable,  and 
thus  increases  the  quantity  of  sugar  refined  from  domestic 
beets  as  compared  with  cane  sugar.  High  duties  on  raw  sugar 
therefore  work  against  monopoly,  since  the  sources  of  supply 
for  beet  sugar  are  widely  scattered,  and  the  beet  factories  are 
small,  and  consequently  hard  to  control.  On  the  other  hand,  a 
low  duty  on  raw  sugar — or  none  at  all — ^makes  the  growing  of 
sugar  beets  unprofitable  in  many  sections,  and  thus  stimu- 
lates the  cane  sugar  branch.    The  result  is  that  we  find  some 

^  Industrial  Commission,  I,  p.  loi. 

'This  is  denied  by  Professor  Taussig.  "The  [sugar]  refining  industry, 
whether  or  no  it  needed  protection  in  earlier  days,  ceased  to  need  it  by  the 
close  of  the  nineteenth  century."  Some  Aspects  of  the  Tariff  Question,  p.  107. 

*  Industrial  Conunission,  I,  p.  115. 

*Ibid.,  p.  loi. 


of  the  officials  of  the  American  Sugar  Refining  Company  in 
favor  of  disposing  of  the  beet  sugar  properties,  and  of  re- 
ducing the  tariff  on  sugar.^ 

One  of  the  worst  charges  that  may  be  made  against  the 
American  Sugar  Refining  Company  is  the  fact  that,  though  at 
times  it  practically  framed  the  sugar  schedule,  it  sought  to 
avoid  payment  of  the  custom  duties  on  raw  sugar  by  tampering 
with  the  weighing  scales  at  the  ports  in  such  manner  as  to  regis- 
ter false  weights.  An  investigation  undertaken  by  the  govern- 
ment in  1907  resulted  in  a  suit  against  the  company  to  recover 
the  amount  of  money  stolen  from  the  government  through  false 
weighing  at  the  Brooklyn  plant.  The  evidence  in  the  suit, 
according  to  the  Attorney  General,  revealed  a  long  continued 
system  of  defrauding  the  government,  of  unparalled  depravity.* 
The  District  Court  gave  a  judgment  ordering  the  company  to  pay 
the  United  States  $134,411,  representing  unpaid  custom  duties.' 
Thereupon  the  company  opened  negotiations  with  the  govern- 
ment, and  in  1909  a  compromise  was  made  whereby  the  latter 
accepted  the  judgment  of  $134,411,  plus  an  additional  sum  of 
$2,000,000,  in  full  settlement  of  all  civil  liabilities  of  the  com- 
pany for  any  underweighing  at  either  the  Brooklyn  refinery  or 
the  Jersey  City  refinery.* 

The  government  especially  reserved  the  right  to  institute 
criminal  prosecutions  against  the  officials  responsible  for  the 
underweighing.  Subsequently  suit  was  brought  against  the 
secretary  of  the  company,  and  the  general  superintendent  of  the 
Brooklyn  refinery.  Both  of  them  were  convicted  of  fraud;  and 
upon  i^peal  their  conviction  was  sustained  by  the  higher  courts.^ 
TTie  former  was  given  a  sentence  of  eight  months'  imprisonment 
and  a  fine  of  $8,000  and  costs;  and  the  latter  was  given  two 
years  in  jail  and  a  fine  of  $5,000.  Both  petitioned  for  executive 
demency,  and  by  order  of  President  Taft  the  sentence  of  the 

^  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2052. 

*  Annual  Rqx>rt  of  the  Attorney  General,  1909,  p.  12. 

•Ibid.,  p.  II. 

*Ibki.»p.  12. 

'Ibid.,  1910,  p.  21;  1911,  p.  20;  1913,  p.  27. 


fonner  was  commuted  to  fine  and  costs,  and  of  the  latter  to  30 
days  in  jail. 

The  importance  of  these  underweighing  practices,  however, 
must  not  be  exaggerated.  They  evidence  the  cupidity  of  the 
sugar  companies,  or  perhaps  the  desire  of  their  managers  to  get 
results  (and  thus  earn  their  salaries) ;  but  even  if  never  discovered, 
they  would  not  have  helped  the  trust  appreciably  to  maintain 
its  position,  except  by  providing  it  with  the  sinews  of  war.  At 
best,  they  would  merely  have  enabled  it  (and  the  other  com- 
panies that  carried  on  these  practices)  to  make  somewhat  larger 

The  American  Sugar  Refining  Company  has  also  been  guilty 
of  other  abuses.  It  has  been  the  recipient  of  special  railroad 
favors.  Freight  in  the  sugar  trade  is  an  important  item;  the 
territory  in  which  a  sugar  refining  concern  can  profitably  sell 
depends  largely  on  the  freight  rates.  Both  the  testimony  of 
officials  and  the  decisions  of  the  courts  bear  witness  to  the  fact 
that  the  American  Sugar  Refining  Company  has  obtained  rail- 
road rebates;  ^  in  fact,  the  federal  government  has  collected 
large  sums  of  money  by  way  of  fines  for  these  illegal  practices.* 
The  company  has  also  made  use  of  local  price  discrimination, 
factor's  agreements,  and  covenants  restraining  sugar  refiners 
from  reentering  the  field.  A  special  form  of  competition  directed 
against  the  beet  sugar  companies — so  the  government  petition 
charges — was  the  practice  of  erecting  beet  sugar  factories  in  the 
neighborhood  of  proposed  independent  plants,  and  of  contract- 
ing for  all  the  available  beets  in  the  neighborhood,  thereby 
making  it  impossible  for  the  independent  factories  to  engage  in 

The  American  Sugar  Refining  Company,  up  to  the  death  of 
Mr.  Havemeyer  in  1907,  was  a  great  advocate  of  secrecy  in 
corporate  affairs;  and  subsequent  events  made  it  clear  that  this 
policy  was  adopted  mainly  because  so  much  was  being  done 

*See  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912, 
pp.  301-302,  1419;  and  212  U.  S.  481-499. 

*  Original  Petition,  p.  91. 

*  Ibid.,  p.  147. 


that  could  not  bear  the  light  of  day.  Up  to  1907,  for  example, 
very  UtUe  information  was  given  out  in  regard  to  the  earnings 
of  the  company.  Mr.  Havemeyer,  in  answer  to  the  queries  of 
the  Industrial  Commission,  stated  the  philosophy  which  under- 
lay this  attitude  of  the  company.  "Q. — ^Do  you  believe  that 
these  trusts  should  be  put  more  specifically  under  governmental 
control  than  they  are,  that  they  should  have  examination  or 
inspection  similar  to  the  national  banks?  Mr.  Havemeyer. — 
Not  at  alL  I  think  the  Government  should  have  nothing  to  do 
with  them  in  any  way,  shape,  or  manner. 

"  Q. —  You  think,  then,  that  when  a  corporation  is  chartered 
by  the  State,  offers  stock  to  the  public,  and  is  one  in  which  the 
public  is  interested,  that  the  pubUc  has  no  right  to  know  what 
its  earning  power  is  or  to  subject  them  to  any  inspection  what- 
ever, that  the  people  may  not  buy  this  stock  blindly? 

"  Mr.  Havemeyer. — Yes;  that  is  my  theory.  Let  the  buyer  be- 
ware; that  covers  the  whole  business.  You  can  not  wet  nurse 
people  from  the  time  they  are  bom  until  the  time  they  die. 
They  have  got  to  wade  in  and  get  stuck,  and  that  is  the  way  men 
are  educated  and  cultivated. "  ^ 

Of  recent  years,  however,  the  policy  of  the  company  has 
changed.  According  to  its  officials,  its  policy  is  to  give  the 
greatest  possible  publicity  to  its  affairs. 

Railroad  favors  and  unfair  competitive  methods  thus  helped 
the  sugar  trust  to  establish  its  position.  But  undoubtedly  the 
greatest  source  ojf  the  sugar  trust's  strength  was  its  financial 
ability  to  buy  out  those  concerns  that  proved  themselves  able  to 
compete  successfully  with  it.  The  tariff  wall  shut  out  foreign 
axnpetition;  all  that  was  necessary  to  retain  control  was  the 
acquisition  of  the  strongest  concerns  in  this  country.  During 
the  earlier  years  of  the  life  of  the  trust,  this  policy  of  buying  out 
competitors  proved  generally  successful,  in  spite  of  the  per- 
sistence of  these  competitors.  But  recently,  especially  with  the 
development  of  the  beet  sugar  industry,  the  American  Sugar 
Refining  Company  has  been  steadily  declining  in  relative  im- 

*  Industrial  Commission,  I,  pp.  122-123. 


portance.  Apparently  it  is  losing  its  right  to  be  called  a  trust. 
A  seeker  after  truth  might  properly  inquire,  why,  if  the  trust 
form  of  organization  is  in  fact  more  efficient,  the  sugar  trust  has 
not  held  its  own  against  independent  refiners,  even  with  the 
purchase  now  and  then  (at  excessive  figures)  of  the  more 
aggressive  of  its  competitors?  Before  accepting  industrial  mo- 
nopoly as  a  natural  evolution,  he  would  be  justified  in  asking 
for  more  proof  of  the  fact  of  such  economies. 

As  to  the  influence  of  the  trust  on  prices,  the  former  head  of 
the  American  Sugar  Refining  Company  claimed  that  the  sugar 
trust  had  been  a  benefit  to  the  country;  that  it  had  reduced 
prices  to  the  consumer.  As  proof,  he  compared  the  average 
margin  ^  between  raw  and  refined  sugar  during  the  nine  years 
1879  to-  1887 — the  trust  was  established  in  1887 — ^with  the 
average  margin  during  the  eleven  years  1888  to  1898.  His 
comparison  showed  that  whereas  the  margin  averaged  1.098 
cents  during  the  period  prior  to  the  organization  of  the  trust,  it 
averaged  only  .966  cents  during  the  period  subsequent  thereto.* 
This  proved,  it  was  claimed,  that  the  consumer  had  benefited  by 
the  existence  of  the  trust. 

This  comparison,  however,  is  not  convincing.  The  period 
prior  to  1887,  as  the  following  table  shows,  was  one  of  high 
margins  during  the  years  1879  to  1882,  but  also  one  of  rapidly 
declining  margins.  The  scale  of  operations  was  being  greatly 
expanded,  with  a  consequent  lowering  of  costs;  and  comp)etition 
being  active,  lower  prices  for  refined  sugar  and  lower  margins 
were  the  natural  result.  Had  Mr.  Havemeyer  compared  the 
four  years  1884  to  1887  with  the  four  years  1888  to  1891  or  with 
the  four  years  1892  to  1895 — the  American  Sugar  Refining 
Company  was  organized  in  1891 — ^he  would  have  arrived  per- 
force at  the  opposite  conclusion. 

A  more  significant  study  is  the  course  of  prices  year  by  year, 

^  Because  of  the  frequent  fluctuations  in  the  price  of  raw  sugar,  the  signifi' 
cant  figure  is  not  the  price  of  refined  sugar,  but  the  difference  between  the 
price  of  raw  and  refined  sugar,  known  as  the  margin.  The  margin  represents 
the  cost  of  refining,  plus  profits. 

*  Industrial  Commission,  I,  p.  103. 


interpreted  in  the  light  of  the  facts  related  in  the  historical 
survey.   These  prices  are  shown  in  the  table  below. 

Price  of  Raw  and  Refined  Sugar,  and  Margin  Between  them, 

1879  TO  1914  * 




Granu-  1 


lated  in 




'    testing 




r      testing 

barrels,     M 


9^.  Per 


p<r.  Per 







•      7.423 




•.     3.557 




.     8 





..     4 


4  965 



.     8. 



1. 416 


..     4 





.      7 


9  234 



..     4 


S-320     ^ 



.      7 





..     4 


5  050        I 








■  .     3 





.      S 





.     3 





•      S 


6. 117 



.     3 





•     5 





..     4 










.     3 





.     6, 





.     3 





•     5 


6. 171 



..     4 










•     4. 










-     4 





.      3 



1. 153 


.     4 









191 2. 

•     4 





.     3 





•     3 







4  532 



•      3 




During  the  first  four  years  shown  in  the  table  the  margin 
between  the  price  of  raw  and  refined  sugar  was  high.  Costs  were 
hi^,  and  the  margin  was  necessarily  high,  if  refineries  were  to 
make  a  reasonable  profit.  During  the  early  eighties,  however,  as 
shown  elsewhere,  sugar  refineries  were  much  enlarged;  and  it 
became  apparent  that  only  those  refiners  could  live  who  were  in  a 

'Industrial  Commission,  I,  p.  103;  and  Willett  and  Gray's  Weekly 
Statistical  Sugar  Trade  Journal. 

*  Trust  formed  the  year  previous. 

*In  March  and  April  of  this  year  the  four  Philadelphia  refineries  were 


position  to  secure  the  economics  of  large-scale  production.  The 
result  of  this  movement  was  increased  output,  lower  costs,  and 
reduced  margins.  The  margin  had  been  1.362  cents  per  pound 
in  1879,  and  1.437  cents  in  1882;  by  1887  it  had  fallen  to  .768 
cents.  In  October,  1887,  the  Sugar  Refineries  Company — ^a 
trustee  device — became  operative,  and  the  next  year  the  margin 
rose  to  1.258  cents,  an  increase  of  almost  half  a  cent  a  pound. 
Possibly  the  margin  in  1887  was  so  low  that  even  under  comp)eti- 
tive  conditions  it  would  have  subsequently  increased,  and  there- 
fore it  may  not  be  correct  to  ascribe  all  the  advance  to  the  trust. 
Nevertheless  it  would  seem  to  be  clear  that  the  trust  did  ad- 
vance prices  in  1888,  and  that  they  were  higher  than  they  would 
have  been  had  it  not  been  for  the  trust.  In  1889  the  margin 
continued  high,  though  somewhat  less  than  in  1888.  These 
high  prices,  however,  could  not  be  maintained.  The  price  of 
refined  sugar  dropped  even  more  than  the  price  of  raw,  and  the 
margin  in  1890  was  only  .720  cents,  and  in  1891,  .828  cents.  In 
March  and  April  of  1892,  it  will  be  remembered,  the  four  Phila- 
delphia refineries  were  acquired,  and  the  American  Sugar  Refin- 
ing Company  produced  98  p)er  cent  of  the  coimtry's  output. 
The  margin  increased  from  .488  cents  per  pound  in  February  to 
.916  cents  in  March,  and  to  1.105  cents  in  April.  ^  The  average 
margin  for  the  year  was  1.035  cents  in  1892,  and  1.153  cents 
in  1893  (a  panic  year).  These  high  margins  led,  even  in  a 
period  of  industrial  depression,  to  the  building  of  a  number  of 
competing  refineries;  and  this  would  seem  to  explain,  in  part  at 
least,  the  lower  margins  from  1894  to  1897.  In  1898  both  the 
Doscher  and  the  Arbuckle  refineries  began  operations.  In  that 
year  the  margin  fell  to  .730  cents,  and  in  1899  to  .500  cents. 
Mr.  Havemeyer  testified  before  the  Industrial  Commission  that 
the  decline  in  the  margin  in  1898  was  caused  by  competitors  (or 
** interlopers"  as  he  called  them)  starting  active  operations.* 
The  margin  for  1899  averaged  .50  cents  per  pound.    This  was 

*  Jenks,  Bulletin  of  the  Department  of  Labor,  vol.  V,  no.  29,  p.  713.  For 
weekly  quotations  see  Report  of  the  Federal  Trade  Commission  on  the  Beet 
Sugar  Industry  in  the  United  States,  pp.  108-122. 

*  Industrial  Commission,  I,  p.  108. 


undoubtedly  below  the  actual  cost  of  refining.  Mr.  Doscher 
testified  before  the  Industrial  Commission  that  refining  then 
cost  from  .50  to  .60  cents  per  pound,  but  as  a  rule  about  .60 
cents. ^  Others  placed  it  at  .63  cents,  .65  cents,  and  between  .50 
cents  and  .75  cents.^  Obviously  such  a  low  margin  could  not 
long  continue.  In  the  middle  of  1900  the  National  Sugar  Refin- 
ing Company  of  New  Jersey,  controlled  by  the  American  Sugar 
Refining  Company  and  its  stockholders,  acquired  three  of  the 
independent  concerns,  including  the  Doscher,  and  the  margin 
went  up  to  .754  cents.  The  full  effect  of  these  acquisitions  was 
not  felt,  however,  imtil  the  year  1901,  when  the  margin  rose  to 
1.003  cents  per  pound.  This  differential  made  the  manufacture 
of  sugar  quite  profitable,  and  as  a  result  new  refineries  were  con- 
structed. By  1902  the  margin  had  fallen  to  .913  cents.  After 
that  date  and  down  to  1914  at  least,  though  there  were  some 
fluctuations,  the  margin  showed  surprisingly  few  changes  of  any 
importance.  Mr.  Gilmore,  of  Arbuckle  Brothers,  said  in  191 1 
that  the  margin  from  1905  on  indicated  competitive  conditions.* 
There  was  no  longer  a  sugar  war,  he  said,  but  a  condition  of 
armed  neutrality.  Each  refiner  was  trying  to  do  the  best  he 
could  for  himself,  and  meanwhile  watching  the  other  fellow 
pretty  closely.  The  cost  of  refining  cane  sugar  then  ran  from 
about  .60  to  .65  cents  per  pound;  ^  the  margin  averaged  about 
.90  cents  per  pound;  and  there  was  left  about  one-quarter  of  a 
cent  per  pound  for  profit.  The  American  Sugar  Refining  Com- 
pany, gradually  losing  control  of  the  industry,  was  unable, 
apparently,  after  1905  to  raise  the  price  much,  if  any,  above  a 
competitive  level. 

The  dividends  of  the  American  Sugar  Refining  Company  point 
to  monopoly  prices  during  the  period  when  the  company  was  at 
the  height  of  its  power,  and  to  the  leveling  effect  of  competition 
on  prices. 

'  Industrial  Commission,  I^  pp.  SS^  94. 

'Ibid, pp.  112,  150;  Hearings  on  the  American  Sugar  Refining  Company, 
1911-X912,  p.  1 134. 
•  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  1140. 
^Ilnd.,  pp.  1 149,  1986,  2260;  and  Original  Petition,  p.  34. 


Since  its  organization  in  1891  the  American  Sugar  Refining 
Company  has  r^;ularly  paid  7  per  cent  on  its  preferred  stock  and 
the  following  rates  on  its  common  stock: 

Common  Stock  Diyidbnds  of  the  American  Sugar  Refining  Company, 


1891 8 

1892 9 

1893 22 

1894 12 

1895 12 

1896 12 

1897 12 

1898 12 

1899 12 

1900 6)4 

Just  how  much  water  there  was  in  the  stock  can  not  be  stated 
with  certainty.  The  capitalization  of  the  companies  that  went 
into  the  trust  in  1887  was  $6,590,000;^  the  amount  of  trust 
certificates  issued  in  1887  and  of  stock  in  1891  was  $50,000,000, 
minus  15  per  cent  treasury  stock.  The  capitalization  of  the 
trust  thus  exceeded  the  capitalization  of  the  constituent  com- 
panies by  more  than  six  times.  But  according  to  Mr.  Havemeyer 
the  constituent  companies  were  undercapitalized;  their  assets 
were  worth  much  more  than  the  amount  of  the  capitalization. 
The  Industrial  Commission  in  its  review  of  evidence  states  that 
the  American  Sugar  Refining  Company,  beyond  question,  was 
capitalized  at  a  sum  at  least  twice  as  large  as  the  cost  of  recon- 
structing the  plants  in  1899  to  1900,  and  the  cost  of  building  was 
then  very  much  higher  then  than  it  had  been  at  an  earlier  date.' 
The  value  of  the  brands,  which  was  considerable,  must  not, 
however,  be  overlooked.  While  an  accurate  estimate  of  the 
extent  to  which  the  capital  stock  of  the  trust  represented  prop- 
erty, and  the  extent  to  which  it  represented  the  hope  of  monopoly 

*  Lexow  Report  (1897),  p.  384. 

•  Industrial  Commission,  I,  p.  13  (Review  of  Evidence). 


gains,  can  not  be  made,  there  is  no  doubt  that  the  amount  of 
water  was  considerable.  The  Court  of  Appeals  of  New  York 
state  referred  to  the  stock  of  the  Sugar  Refineries  Company 
(the  sugar  "trust")  as  being  "heavily  watered."  and  "proudly 
defiant  of  actual  values; "  ^  and  Mr.  Oxnard  admitted  that  when 
his  company  joined  the  trust  in  1887  it  received  $750,000  of 
trust  certificates  for  property  worth  $200,000,  and  capitalized 
at  $100,000.' 

It  is  evident  that  the  profits  of  the  American  Sugar  Refining 
Company  during  perhaps  the  first  ten  years  of  its  existence  were 
enormous.  In  1893,  after  98  per  cent  of  the  industry  had  been 
acquired,  the  dividends  paid  on  the  common  stock  were  22  per 
cent — a  much  larger  per  cent,  as  a  matter  of  course,  on  a  reason- 
able capitalization.  From  1894  through  1899,  12  per  cent 
dividends  were  regularly  paid.  Since  1900  the  profits  and  divi- 
dends have  been  much  less.  The  company  has  been  unable  to 
charge  monopoly  prices  during  the  greater  part  of  the  period 
smce  1900,  and  from  1901  to  1915  only  7  per  cent  was  paid  on  the 
common, — ^not  so  meager,  after  all,  the  actual  investment  being 
taken  into  consideration. 

It  might  seem  as  if  the  difiFerence  between  monopoly  prices 
and  competitive  prices  is  so  small  that  the  matter  is  not  of  much 
consequence  to  the  public.  The  margin  at  its  highest  after  the 
organization  of  a  sugar  trust  was  1.258  cents  per  pound  (1888); 
and  the  normal  margin  under  more  or  less  competitive  conditions 
was  about  nine-tenths  of  a  cent.  The  difiFerence,  therefore,  is 
only  about  one-third  of  a  cent  per  pound.  But  this  small  sum 
amounts  to  a  great  deal  in  the  aggr^ate.  The  total  consumption 
of  refined  sugar  in  the  United  States  in  1915  was  3,648,108  long 
tons,  or  8,171,761,920  pounds.  Of  this  amount,  34.06  per  cent, 
or  2,783,302,109  pounds,  was  refined  by  the  American  Sugar 

*  121  New  Yoik  Reports  614,  635. 

'  Hearings  on  the  American  Sugar  Refining  Company,  191 1-191 2,  pp.  371- 
373.  A  committee  of  the  House  investigating  the  American  Sugar  Refining 
Company  declared  that  the  real  value  of  the  properties  acquired  by  the  trust 
in  1887  was  not  over  twenty  to  twenty-five  millions.  House  Report  no.  331, 
62nd  Cong.,  2nd  Sess.,  p.  25. 


Refining  Company.  Had  the  company  been  able  to  get  one- 
third  of  a  cent  more  for  its  output  (as  in  the  halcyon  days  after 
the  formation  of  the  trust),  its  profits  would  have  been  increased 
by  $9,277,720;  and  had  all  this  sum  been  disbursed  in  dividends, 
the  dividend  rate  on  the  (heavily  watered)  common  stock  could 
have  been  increased  from  7  per  cent  to  over  27  p)er  cent. 

At  this  point  the  presentation  of  facts  respecting  this  trust 
may  properly  close,  and  the  reader  may  ponder  for  himself  on  the 
problem  involved  in  the  collection  of  a  toll  (in  small  amounts 
from  each  but  enormous  in  the  aggregate)  from  millions  of  people 
by  a  trust  which  has  been  for  a  generation  a  noted  recipient  of 
tarifif  favors. 



The  history  of  the  tobacco  trust  begins  with  the  organization 
of  the  American  Tobacco  Company  in  1890.  After  1887,  at- 
tempts had  been  made  to  consolidate  some  of  the  leading  manu- 
facturers of  cigarettes,  but  these  efforts  proved  unsuccessful 
until  1890.^  On  January  21  of  that  year  the  American  Tobacco 
Company  was  incorporated  in  the  state  of  New  Jersey,  with  a 
capital  of  ,t2«;.ooo^ooOj — $i^jQoq^^)0  common,  and  ^10^090^000 
preferred.'  The  American  Tobacco  Company  was  a  consolida- 
tion of  five  of  the  leading  manufacturers  of  cigarettes,  producing 

*  On  the  tobacco  trust  see:  Report  of  the  Commissioner  of  Corporations  on 
the  Tobacco  Industry,  part  I,  Position  of  the  Tobacco  Combination  in  the 
Industry  (February  25,  1909),  part  II,  Capitalization,  Investment,  and 
Earnings  (September  25,  191 1),  and  part  III,  Prices,  Costs  and  Profits 
(March  15,  191 5);  Original  Petition  in  United  States  v.  American  Tobacco 
Company  et  al.;  Transcript  of  Record,  in  five  volumes,  in  United  States  v. 
American  Tobacco  Company  et  al.  (no.  660),  and  in  American  Tobacco 
Company  et  al.  v.  United  States  (no.  661);  Brief  for  the  United  States  in 
United  States  v.  American  Tobacco  Company  et  al.  (no.  118),  and  in  Ameri- 
can Tobacco  Company  et  al.  v.  United  States  (no.  119);  164  Fed.  Rep. 
700-728;  191  Fed.  Rep.  371-431;  221  U.  S.  106-193;  Industrial  Conmiission, 
vd.  XIII,  pp.  305-342;  Report  of  Joint  Committee  of  the  Senate  and  As- 
sembly appointed  to  investigate  trusts,  transmitted  to  the  New  York  State 
Legislature,  March  9,  1897  (Lexow  Report),  pp.  860-926,  983-998;  Jacob- 
stein,  The  Tobacco  Industry  in  the  United  States. 

'  Report  of  the  Conmiissioner  of  Corporations  on  the  Tobacco  Industry, 
pert  I,  pp.  64-65.  Referred  to  hereafter  as  Report  on  the  Tobacco  Industry. 
•  The  fair  value  of  the  tangible  assets  acquired  by  the  American  Tobacco 
Company  was  $3,545,108  plus  notes  of  the  oiganizers  amounting  to  $1,825,- 
354,  a  total  of  $5,370,462.  The  balance  ($19,629,538)  might  be  regarded  as 
representing  good  will.  The  Bureau  of  Corporations,  however,  found  the 
good  will  to  be  worth  only  $8,954,892.  The  overcapitalization,  therefore, 
was  very  marked.   Sec  Report  on  the  Tobacco  Industry,  part  II,  p.  8. 



in  the  aggregate  95  per  cent  of  the  country's  output  of  cigarettes.^ 
It  thus  possessed  a  high  degree  of  monopolistic  control.  The 
leading  concern  was  W.  Duke,  Sons  and  Company,  controlled 
by  Mr.  James  B.  Duke.  Under  Mr.  Duke's  management  the 
output  of  this  concern  had  increased  from  approximately 
30,000,000  cigarettes  in  1883  to  940,000,000  in  1889.^  Mr.  Duke 
testified  that  his  company  prior  to  the  organization  of  the  com- 
bination did  about  40  per  cent  of  the  cigarette  business  of  the 
country.*  The  other  four  concerns  had  been  prospering,  and 
had  been  increasing  their  output  rapidly.^  Competition  among 
them,  it  is  true,  had  been  quite  vigorous.  Very  extensive  adver- 
tising had  been  resorted  to,  and  large  premiums  had  been  given 
to  merchants  and  consumers.  The  Duke  concern  alone  had 
expended  $800,000  in  advertising  and  premiums  in  1889.  These 
heavy  selling  expenses  had  greatly  reduced  the  profits  of  the  five 
companies,  and  had  undoubtedly  promoted  the  establishment 
of  a  combination.  But  there  is  little  reason  to  believe  that  this 
competition  had  been  ruinous  to  the  parties  concerned.  The 
firm  of  W.  Duke,  Sons  and  Company  which,  according  to  its 
president,  was  worth  only  about  $250,000  in  1885,  was  worth 
$7>5oo>ooo  in  1889.^  Certainly  the  leading  concern  found  the 
profits  enormous,  despite  the  great  outlays  for  competitive 

Having  effected  a  monopolistic  position  the  American  Tobacco 
Company  sought  to  maintain  this  position  by  entering  into 
agreements  for  the  exclusive  use  of  the  best  cigarette  machines; 
in  fact,  the  possibility  of  acquiring  exclusive  control  over  these 

1 221  U.  S.  156. 

*  Transcript  of  Record  in  United  States  r.  American  Tobacco  Company 
(no.  660),  vol.  IV,  p.  335. 

'  Ibid.,  p.  337.  During  the  ten  years  prior  to  1890  the  business  of  making 
cigarettes  was  revolutionized  through  the  introduction  of  patented  machines 
(Original  Petition  in  United  States  v.  American  Tobacco  Company,  p.  13), 
and  this,  no  doubt,  is  a  partial  explanation  of  the  ability  of  one  company  to 
gather  to  itself  such  a  large  percentage  of  the  country's  business. 

^  Original  Petition  in  United  States  v.  AmericanTobacco  Company,  p.  14. 

» Transcript  of  Record  in  United  States  r.  American  Tobacco  Company 
(no.  660),  vol.  rv,  pp.  334,  337. 


machines  was  one  of  the  inducements  to  the  formation  of  the 
company.^  The  importance  of  machinery  in  the  manufacture 
of  cigarettes  is  made  clear  by  a  report  of  the  Commissioner  of 
Labor.  In  1876  the  labor  cost  of  a  cigarette  made  by  hand  was 
96.4  cents  per  thousand;  in  1895  for  the  same  cigarette  made  by 
machinery  it  was  only  8.1  cents  per  thousand.^  Among  the  best 
cigarette  machines  was  the  Bonsack,  and  the  American  Tobacco 
Company  almost  immediately  upon  its  organization  entered  into 
a  contract  for  the  exclusive  use  during  a  period  of  three  years 
of  the  cigarette  machines  of  the  Bonsack  Machine  Company.' 
The  Bonsack  Company,  as  a  part  of  the  contract,  terminated  its 
outstanding  agreements  with  all  other  manufacturers  of  cigar- 
ettes. This  exclusive  control  of  the  Bonsack  machines  was, 
the  Commissioner  of  Corporations  believes,  the  principal  factor 
in  the  extraordinary  success  of  the  American  Tobacco  Company 
from  1890  to  1895.*  Toward  the  close  of  1895,  however,  the 
Bonsack  Company,  by  adverse  court  decisions,  was  deprived  of 
its  exclusive  rights  to  the  most  important  parts  of  the  machine, 
and  as  a  result  the  American  Tobacco  Company  lost  the  ad- 
vantage of  this  artificial  prop.  The  American  Tobacco 
Ccvmpany  likewise  seciu^  possession  of  the  patents  on  the 
Allison  machine,  and  was  thus  able  to  prevent  its  use  by 
its  comi)etitors.  Other  patents  and  machines  in  considerable 
number  were  acquired  by  the  American  Tobacco  Company  after 
its  oigamzation,  the  purpose  in  some  cases  being  to  utilize  these 
patents  and  machines,  in  other  cases  to  prevent  their  utilization 
by  competitors. 

In  addition  (o  the  endeavor  to  maintain  its  position  by  mon- 
<q>olizing  the  machinery  for  the  manufacture  of  cigarettes,  the 
cigarette  trust  employed  another  policy, — a  policy  which  it 
continued  throughout  its  whole  career.  This  was  the  acquisition, 
at  high  prices  if  necessary,  of  its  most  vigorous  competitors. 
Cigarette  cmnpanies  in  considerable  numbers  were  acquired 

^  Report  on  the  Tobacco  Industry,  part  I,  p.  64. 

'  Thirteenth  Annual  Report  of  the  Commissioner  of  Labor  (1898),  p.  73- 

*  Report  on  the  Tobacco  Industry,  part  I,  pp.  67,  266. 

*  Ifa&d.,  part  I,  p.  266. 


after  1890,  as  a  means  of  retaining  the  monopolistic  position 
originally  attained.^  The  plants  thus  acquired  were  generally 
closed;  and  the  brands,  though  sometimes  utilized,  were  usually 
withdrawn.^  Frequently  the  owners  of  the  plants  acquired  were 
compelled  to  s^  an  agreement  not  to  reenter  the  tobacco 
business  again  for  a  number  of  years.' 

The  next  trust  in  the  tobacco  industry  was  formed  in  the  plug 
branch.  By  the  purchase  of  the*  National  Tobacco  Works  in 
1891  the  American  Tobacco  Company  had  acquired  several 
popular  plug  brands.  In  1893,  Mr.  James  B.  Duke,  president  of 
the  American  Tobacco  Company,  endeavored  to  engineer  a  com- 
bination of  plug  tobacco  concerns.*  Not  proving  successful  in 
this,  the  American  Tobacco  Company  in  1894  began  an  aggres- 
sive campaign  for  the  control  of  the  plug  business.  As  a  part  of 
the  competitive  warfare,  prices  were  cut  below  cost.^  The 
principal  brand  made  use  of  in  this  fight  was  appropriately 
termed  "  Battle  Ax."  In  1891  this  brand  had  retailed  at  50  cents 
per  pound;  in  1894  the  price  was  reduced  to  30  cents.*  This 
policy  of  price  cutting  was  accompanied  by  an  advertising  cam- 
paign, which  was  pushed  most  vigorously  in  the  territory  of  the 
leading  competitors.  In  some  sections,  indeed,  agents  of  the 
American  Tobacco  Company  presented  every  man  they  met 
with  a  free  sample  of  "Battle  Ax."  By  such  means,  the  Ameri- 
can Tobacco  Company,  aided  as  it  was  by  the  advantages  en- 
joyed through  its  control  of  the  cigarette  trade,  was  able  to 
increase  its  sales  of  plug  tobacco  from  9,000,000  pounds  in  1894 
to  38,000,000  pounds  in  1897;  and  its  proportion  of  the  total 
production  from  5.6  per  cent  to  20.9  per  cent.^ 

*For  an  account  of  the  cigarette  concerns  acquired  from  1890- 1904, 
see  Report  on  the  Tobacco  Industry,  part  I,  pp.  67-71,  79-93. 

'  Brief  for  United  States  in  United  States  v.  American  Tobacco  Company 
(nos.  118,  119),  p.  9. 

•Testimony  of  Mr.  James  B.  Duke  before  Industrial  Conunission,  XIII, 

p.  323. 

*  Original  Petition  in  United  States  v.  American  Tobacco  Company,  p.  25. 
'  221  U.  S.   160. 

•  Report  on  the  Tobacco  Industry,  part  I,  p.  96. 
'  Ibid.,  pp.  97-98, 


This  expansion  of  its  oi>erations,  however,  was  expensive. 
During  the  four  years  from  1895  to  1898,  the  American  Tobacco 
Company  sustained  losses  on  its  plug  business  amoimting  to 
more  than  $3,300,000.^  This  competition  was  ruinous,  especially 
to  the  concerns  unable  to  make  up  their  losses  in  the  plug  branch 
out  of  the  enormous  profits  of  the  cigarette  branch.  It  was 
ruinous,  not  because  competition  is  naturally  or  inevitably 
ruirious,  but  because  the  cigarette  trust  was  deliberately  man- 
oeuvring to  force  the  manufacturers  of  plug  tobacco  into  a  com- 
bination. By  early  in  1898  the  outside  manufacturers  had  been 
brought  into  the  proper  frame  of  mind;  they  had  come  to  favor  a 
combination  as  a  means  of  obtaining  relief  from  the  attacks  on 
their  business.  The  first  plan  for  a  combination  fell  through, 
however,  partly  because  the  promoters  feared  that  the  Spanish- 
American  War,  with  its  increased  revenue  taxes,  would  seriously 
affect  the  profitableness  of  the  combination.  The  American 
Tobacco  Company  thereupon,  in  the  fall  of  1898,  piu'chased  two 
more  important  plug  companies,  and  apparently  was  about  to 
give  its  rivals  another  taste  of  cutthroat  competition.  These 
purchases  undoubtedly  hastened  the  nlovement  for  the  estab- 
lishment of  a  combination  of  the  leading  plants.  By  October, 
1898,  the  definite  announcement  was  made  that  a  consolidation 
of  the  leading  plug  plants  would  be  formed,  including  those 
owned  by  the  American  Tobacco  Company.  The  name  of  the 
consolidated  company  was  the  Continental  Tobacco  Company; 
and  it  was  incorporated  in  New  Jersey  on  December  10,  1898, 
with  an  authorized  capital  of  $75,000,000.^  The  new  plug  com- 
bination embraced  nearly  every  important  navy  plug  concern  in 
the  country,  including  the  firm  of  P.  Lorillard.*  But  the  com- 
bination did  not  include  the  Liggett  and  Myers  Tobacco  Com- 
pany, possessing  the  largest  single  plant  of  any  plug  concern. 
And  without  the  Liggett  and  Myers  plant  the  Continental 
Tobacco  Company  could  hardly  carry  out  its  purpose,  which  was 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  367. 

•  Ibid.,  pp.  99-100. 

•Ibid.  For  an  explanation  of  the  terms  "navy"  plug  and  "flat"  plug, 
see  Report  on  the  Tobacco  Industry,  part  III,  pp.  45-46. 


the  monopolization  of  the  plug  business.  This  fact  was  clearly 
realized,  and  the  attempt  was  consequently  made  to  acquire  this 
concern,  though  at  first  without  success. 

The  inability  to  seciu^  control  of  this  ccnnpany  was  due  to 
the  opposition  of  an  element  in  its  management  which  had 
planned  a  raid  on  the  plug  combination.  In  October,  1898,  a 
syndicate,  consisting  of  Mr.  Thomas  Fortune  Ryan,  Mr.  P.  A.  B. 
Widener,  and  Mr.  Anthony  N.  Brady,  among  others,  acquired 
the  National  Cigarette  and  Tobacco  Company,  the  only  real 
rival  of  the  American  Tobacco  Company  in  the  cigarette  busi- 
ness.^ In  the  same  month  the  syndicate  organized  the  Union 
Tobacco  Company  of  America;  and  this  company  took  over  the 
stock  of  the  National  Company.  In  December,  1898,  the  Union 
Tobacco  Company  purchased  86  per  cent  of  the  stock  of  the 
Blackwell's  Diu'ham  Tobacco  Company,  one  of  the  leading 
independent  smoking  tobacco  concerns.  Early  in  1899  it  became 
known  that  the  organizers  of  the  Union  Tobacco  Company  held 
an  option  on  a  majority  of  the  stock  of  the  Liggett  and  Myers 
Tobacco  Company.  The  men  who  had  promoted  the  Union 
Tobacco  Company  apparently  reasoned  that  a  powerful  concern 
standing  outside  the  combination  would  be  in  a  position  to  exact 
a  good  price  as  a  condition  of  joining  it;  and  the  company  was 
clearly  strong  enough  financially  to  cause  great  loss  to  the  combi- 
nation, should  a  struggle  actually  take  place.  This  fact  was  well 
realized  by  the  dominant  interests  in  the  cigarette  and  plug 
combinations,  and  in  1899  the  Continental  Tobacco  Company 
purchased  at  a  very  high  figure  the  Union  Tobacco  Company, 
and  with  it  secured  the  Liggett  and  Myers  concern.^  Mr.  Duke 
testified  subsequently  that  the  purpose  in  buying  the  Union 
Tobacco  Company  was  to  bring  into  the  fold  the  wealthy  finan- 
ciers who  had  promoted  it;  that  the  American  Tobacco  "crowd" 
was  not  strong  enough  financially.'  As  a  matter  of  fact,  the  men 
who  controlled  the  Union  Tobacco  Company  did  shortly  there- 

*  Report  on  the  Tobacco  Industry,  part  I,  pp.  73-74. 
•Ibid.,  p.  100. 

•  Transcript  of  Record  in  United  States  v.  American  Tobacco  Company 
(no.  660),  vol.  rv,  p.  367. 


after  enter  the  directorate  of  either  the  American  Tobacco 
Company  or  the  Continental  Tobacco  Company,  and  they  be- 
came thenceforth  very  important  factors  in  the  control  of  the 
whole  Tobacco  Combination.  With  the  acquisition  of  Liggett 
and  Myers  the  Continental  Tobacco  Company  produced  56.3 
per  cent  of  the  country's  output  of  plug  tobacco;  and  thus 
attained  a  considerable  degree  of  monopoly  control, — 3,  control 
later  much  increased.^  From  the  outset  the  Continental  To- 
bacco Company  was  dominated  by  the  American  Tobacco  Com- 
pany interests,  though  the  American  Tobacco  Company  itself 
held  only  about  one-third  of  the  company's  stock.^  Such  stock 
as  it  held  it  had  received  in  exchange  for  the  plug  business  which 
it  had  developed,  and  which  it  had  turned  over  to  the  Conti- 
nental Tobacco  Company. 

The  formation  of  the  Continental  Tobacco  Company,  domi- 
nated as  it  was  by  the  American  Tobacco  Company,  added 
greatly  to  the  Combination's  control  of  the  smoking  tobacco 
business.  From-4he.JV£iy..b£ginnillg  the  American  Tobacco 
Ccnnpany  had  produced  some  smoking  tobacco;  it  had  inherited 
this  business  from  its  constituent  concerns,  each  of  which  manu- 
factured several  brands  of  smoking  tobacco..  In  1891  two  addi- 
tional smoking  tobacco  concerns  were  acquired.  As  the  result  of 
these  purchases  the  American  Tobacco  Company  produced  in 
1891,  18  per  cent  of  the  country's  output  of  smoking  tobacco. 
During  the  next  few  years,  the  plug  business  especially  was  being 
developed;  and  by  1897  the  American  Tobacco  Company,  de- 
^ite  several  acquisitions,  had  increased  its  proportion  of  the 
smoking  tobacco  business  to  only  22.7  per  cent.  However, 
several  of  the  companies  acquired  by  the  Continental  Tobacco 
Company  in  1898  and  1899  produced  smoking  tobacco  as  well  as 
plug,  and  the  result  was  that  by  1900  the  combined  production  of 
the  American  Tobacco  Company  and  the  Continental  Tobacco 
Company  amoimted  to  59.2  per  cent  of  the  total  output.    This 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  365.  For  an  account  of  the 
acquisitions  of  the  Continental  Tobacco  Company  from  1 899-1904,  see 
Report  on  the  Tobacco  Industry,  part  I,  pp.  103-113. 

*Ibid.,  p.  102. 


gave  the  Tobacco  Combination  a  very  strong  hold  on  this 
branch, — a  hold  which  was  subsequently  extended. 

Another  branch  in  which  the  CombmaUon  mcreased  its 
business  was  the  production  of  fine-cut  tobacco, — a  form  of 
tobacco  used  for  chewing.  From  1890  to  1898  the  production  of 
fine-cut  tobacco  by  the  Combination  was  very  small;  it  never 
exceeded  6  per  cent  of  the  total.  ^  But  with  the  organization  of 
the  Continental  Tobacco  Company,  several  of  whose  constituent 
companies  produced  considerable  amounts  of  fine-cut  tobacco, 
and  with  several  minor  acquisitions  about  the  same  time  by  the 
American  Tobacco  Company,  the  Combination's  percentage  of 
the  business  had  increased  by  1900  to  50.5  j)er  cent, — a  percent- 
age greatly  increased  subsequently. 

Shortly  after  the  organization  of  the  Continental  Tobacco 
Company,  the  dominant  interests  in  the  cigarette  and  plug  trusts 
organized  a  sniiflL  trust.  Since  1891  the  American  Tobacco 
Company  had  produced  a  small  quantity  of  snuflF,  and  in  1899  it 
purchased  some  additional  snuff  concerns.  The  Continental  in 
1898  had  acquired  the  large  snuff  business  of  P.  Lorillard  and 
Company.  The  American  and  Continental  companies  between 
them  sold  in  1899  about  32  per  cent  of  all  the  snuff  sold  in  the 
country.^  This,  however,  was  well  under  the  sales  of  the  Atlantic 
Snuff  Company,  a  combination  in  1898  of  four  concerns  produc- 
ing among  them  46.5  per  cent  of  the  total  output  of  snuff.* 
To  get  control  of  the  snuff  business,  therefore,  it  was  necessary  to 
wage  a  competitive  campaign  against  the  snuff  combination. 
In  1899,  then,  the  American  and  Continental  Companies  greatly 
reduced  the  price  on  some  of  the  leading  brands  of  snuff,  in  the 
face  of  a  doubling  of  the  internal  revenue  tax;  and  they  also  gave 
away  large  quantities  of  snuff  to  prospective  customers.  The 
snuff  combination  followed  suit,  and  until  early  in  1900  competi- 
tion was  quite  vigorous.  A  combination  was  then  decided  upon. 
On  March  12,  1900,  the  American  Snuff  Company  was  incor- 
porated in  the  state  of  New  Jersey.    It  took  over  the  snuff  busi- 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  408. 
•Ibid.,  part  III, p.  138. 

*  Ibid.,  part  I,  p.  141. 


ness  of  the  Atlantic  SnuflF  Company,  the  American  Tobacco 
Company,  the  Continental  Tobacco  Company,  and  the  George 
W.  Hebne  Company.^  The  output  of  the  American  Snuff 
Company  in  1901,  its  first  full  year's  business,  amounted  to  80.2 
per  cent  of  the  total  output  of  snuff.^  It  thus  secured  a  mo- 
nc^listic  position  in  the  industry, — an  accomplishment  that  was 
facilitated  because  of  the  fact  that  the  greater  part  of  the  busi- 
ness was  already  concentrated  in  the  hands  of  a  few  concerns. 
Over  43  per  cent  of  the  stock  of  the  American  Snuff  Company  at 
its  organization  was  given  to  the  American  Tobacco  Company 
and  to  the  Continental  Tobacco  Company  in  exchange  for  their 
snuff  business.'  This  was  only  a  minority,  but  in  view  of  the 
fact  that  large  stockholders  of  the  American  Tobacco  Company 
also  held  stock  in  the  American  Snuff  Company  it  amoimted  to 

By  1900,  therefore,  the  Tobacco  Combination  had  reached  a 
dominant  position  in  the  manufacture  of  all  the  important 
branches  of  tobacco  except  cigars.  It  produced  92.7  per  cent  of 
the  output  of  cigarettes;  62  per  cent  of  the  plug  tobacco;  59.2 
per  cent  of  the  smoking  tobacco;  50.5  per  cent  of  the  fine- 
cut  tobacco;  and  78.0  per  cent  of  the  snuff  (80.2  per  cent  in  1901). 

The  Combination  next  directed  its  attention  to  the  cigar  busi- 
ness, the  most  important  of  all  the  branches  of  tobacco  manu- 
facture.* The  American  Tobacco  Company  had  entered  the 
cheroot  branch  of  cigar  making  in  1891  by  the  purchase  of  the 
business  of  P.  Whitlock,  the  manufacturer  of  "Old  Virginia 
Cheroots";  but  for  some  time  thereafter  it  made  no  ordinary 
cigars.  Shortly  after  the  organization  of  the  Continental  To- 
bacco Company,  the  American  Tobacco  Company  made  plans  to 
engage  in  the  manufacture  of  cigars.  As  the  first  step  in  that 
direction,  it  began  experimenting  with  cigar  making  machines; 

*  Report  on  the  Tobacco  Industry,  part  I,  pp.  143-144..  The  subsequent 
acquisitions  of  the  company  are  shown  on  pp.  146-148. 

•  Ibid.,  part  m,  p.  138. 

•  Ibid.,  part  I,  p.  143. 

*  The  value  of  cigars  in  1904  was  abnost  60  per  cent  of  the  total  value  of  all 
the  manufactured  products  of  tobacco.  Report  on  the  Tobacco  Industry, 
part  I,  p.  50. 


its  control  of  the  machines  for  making  cigarettes  had  shown  it 
the  advantage  of  producing  with  the  aid  of  machinery,  and  of 
controlling  the  patents  on  the  machinery.  But  no  particular 
success  crowned  its  efforts  in  this  direction;  and  even  to-day 
machinery  is  not  much  used  except  in  the  manufacture  of 
the  cheaper  grades  of  cigars.^  In  spite  of  its  lack  of 
success,  in  this  direction,  however,  it  determined  to  or- 
ganize a  cigar  company,  and  to  go  after  the  cigar  busi- 
<  ness.  Accordingly  on  January  12,  1901,  the  American  Cigar 
Company  was  incorporated  in  the  state  of  New  Jersey.^  Over 
70  per  cent  of  its  stock  was  subscribed  to  by  the  American 
Tobacco  Company  and  the  Continental  Tobacco  Company.  The 
American  Cigar  Company  took  over  the  greater  part  of  the  cher- 
oot and  Uttle  cigar  business  of  the  American  Tobacco  Company, 
aiid  soon  purchased  a  number  of  cigar  concerns,  including  the 
Havana-American  Tobacco  Company,  itself  a  combination  of 
cigar  companies.  These  acquisitions  made  the  American  Cigax 
Company  the  largest  manufacturer  of  cigars  in  the  coimtry;  in 
1901  it  produced  10.9  per  cent  of  the  total  output  of  cigars  (not 
including  little  cigars).^  During  1901-1903  the  American  Cigar 
Company  made  a  determined  attempt  to  monopolize  the  busi- 
ness. Prices  were  reduced,  cigars  given  away,  an  extensive  ad- 
vertising campaign  carried  on,  and  expensive  retail  stores  fitted 
up.*  By  such  means  the  leading  interests  in  the  Tobacco  Com- 
bination apparently  hoped  to  duplicate  their  success  in  the  other 
branches.  But  this  campaign  proved  unsuccessful.  Enormous 
losses  were  incurred,  and  though  the  outputof  the  American  Cigar 
Company  was  considerably  increased,  it  manufactured  only  16.4 
per  cent  of  the  total  output  in  1903,  and  even  less  in  the  years 
that  followed.* 

The  explanation  of  this  failure  to  control  the  industry  is  not 
hard  to  find.    In  the  manufacture  of  such  products  as  cigarettes, 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  6. 
^-V  'Ibid.,  p.  151. 

*  See  p.  144. 

*  Repwrt  on  the  Tobacco  Industry,  part  I,  p.  420. 
*See  p.  144. 


plug  tobacco,  and  smoking  tobacco,  machinery  is  extensively 
used.  Even  before  a  combination  was  formed,  there  was  a 
decided  concentration  of  the  business  in  the  hands  of  a  few  con- 
cerns; and  to  bring  together  these  concerns  was  not  particularly 
difficult,  especially  in  the  face  9f  the  pressure  that  was  brought 
to  bear  on  the  recalcitrant.  But  then  (as  now)  a  very  large  pro- 
{x>rtion  of  the  cigars  was  made  by  hand.  Even  when  machinery 
was  used,  it  was  of  much  less  importance  than  in  the  other 
branches  of  tobacco  manufacture.  Because  of  the  fact  that 
machinery  played  little  part,  small  establishments  were  at  no 
great  disadvantage  as  compared  with  large  ones.  A  cigar  factory 
could  be  started  with  small  capital,  and  naturally  there  were — 
and  are — a  great  many  plants.  For  these  reasons  it  was  difficult 
to  establish  an  effective  cigar  combination,  and  even  if  one 
should  be  established  it  would  prove  well-nigh  impossible  for  it  to 
maintain  control  of  the  industry.  Economic  conditions  in  this 
branch  of  the  trade  have  thus  been  such  as  to  thwart  the  designs 
of  the  trust  promoters. 

The  next  important  combination  in  the  tobacco  industry  was 
the  Consolidated  Toharro  Company ^  a  holding  company  organ- 
ized on  June  5,  1901,  to  unite  the  American  Tobacco  Company 
and  the  Continental  Tobacco  Company, — ^the  two  principal 
companies  in  the  Tobacco  Combination.  Immediately  upon  its 
organization  the  Consolidated  Company,  promoted  by  some  of 
the  leading  financial  interests  in  the  tobacco  combinations,  of- 
fered to  exchange  its  4  per  cent  bonds  in  equal  amounts  for  the 
common  stock  of  the  Continental  Tobacco  Company,  and  at  the 
rate  of  2  to  i  for  the  common  stock  of  the  American  Tobacco 
CcMnpany.*  This  offer  was  generally  accepted  by  the  stock- 
holders. The  result  was  to  give  more  complete  control  over  the 
business  to  the  few  financiers  who  already  rather  effectively  con- 
trolled the  management.  At  the  time,  the  exchange  of  their  com- 
mon stock  for  the  bonds  of  the  holding  company  had  seemed  to 
the  stockholders  to  be  quite  profitable.  The  common  stock  of 
the  Continental  Tobacco  Company  had  never  borne  a  dividend, 
and  during  a  considerable  period  had  sold  below  $30  per  share; 
*  Rqx>rt  on  the  Tobacco  Industry,  part  I,  pp.  114-115. 



the  holders  were  now  assured  4  per  cent  regularly.^  The  common 
stock  of  the  American  Tobacco  Company,  highly  watered  as  it 
was,  especially  since  the  declaration  of  a  100  per  cent  stock  div- 
idend in  1899,  paid  only  6  per  cent,  and  was  earning  about  9  per 
cent.^  By  the  exchange  an  8  per  c.ent  return  was  practically  guar- 
anteed. Yet  the  organizbrs  and  stockholders  of  the  Consolidated 
Tobacco  Company  made  enormous  profits.  They  apparently  be- 
lieved that  the  profits  of  the  business  would  be  much  greater  in 
the  future  than  they  had  been  up  to  that  time.  One  reason  for 
this  belief  was  the  probable  removal  of  the  Spanish-American 
War  taxes  on  tobacco  products,  and  the  conviction  that  it  would 
not  be  necessary,  in  view  of  the  control  the  Combination  pos- 
sessed over  the  industry,  to  reduce  prices  by  the  amount  of  the 
tax.^  As  a  matter  of  fact,  the  taxes  were  removed,  and  the  prof- 
its did  increase  enormously.  And  these  profits  largely  went,  of 
course,  not  to  the  bondholders,  but  to  the  few  men  who  held  the 
stock  of  the  Consolidated  Tobacco  Company.  Over  half  of  the 
stock  of  this  company,  in  fact,  was  held  by  six  men, — Messrs. 
James  B.  Duke,  Anthony  N.  Brady,  Oliver  H.  Payne,  Thomas 
F.  Ryan,  P.  A.  B.  Widener,  and  William  C.  Whitney.^  Inasmuch 
as  the  Consolidated  Tobacco  Company  controlled  the  American 
Tobacco  Company,  these  six  men  dominated  the  whole  Tobacco 

The  main  reason  for  the  formation  of  a  holding  company  seems 
to  have  been  to  effect  the  concentration  of  control  just  described. 
Another  purpose,  however,  was  to  obtain  additional  capital  in 
order  to  expand  the  business  of  the  Combination.  One  direction 
which  this  expansion  took  was  the  foreign  trade. 

Since  its  formation  (1890)  the  American  Tobacco  Company 
had  had  a  considerable  foreign  trade,  mainly  in  cigarettes.  Dur- 
ing the  nineties  it  extended  this  trade  considerably.  As  an  aid  in 
selling  its  exported  cigarettes,  and  to  secure  the  advantages  of 
production  near  the  market,  it  acquired  several  comp)anies  in 
foreign  countries,  including  Germany,  Japan,  Australia,  and 
Canada.   In  the  fall  of  1901 ,  the  necessary  cash  being  supplied  by 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  120.     •  Ibid.,  pp.  124-125. 
«Ibid.,  p.  121.  *  Ibid.,  p.  119. 


t])e  organization  of  the  Consolidated  Tobacco  Company,  a  deci- 
sion was  made  to  comj)ete  more  vigorously  for  the  English  trade. 
As  the  first  step  in  this  program,  the  American  Tobacco  Com- 
pany acquired  in  September,  1901,  the  firm  of  Ogden's  (Limited), 
one  of  the  leading  tobacco  manufacturing  concerns  in  the  United 
Kingdom.^  This  invasion  of  their  field  caused  great  alarm  among 
the  other  British  manufacturers  of  tobacco,  and  to  protect  them- 
selves against  the  powerful  American  company  thirteen  of  the 
leading  manufacturers  united  in  December,  1901,  to  form  the 
Imi>erial  Tobacco  Company.  The  British  combination  at  once 
inaugurated  a  campaign  to  drive  out  the  American  concern. 
Large  bonuses  were  offered  to  such  customers  as  would  agree  not 
to  handle  American  goods  for  a  period  of  years.  The  American 
Tobacco  Company,  through  the  Ogden's  concern,  retaliated  by 
promising  to  its  British  customers  all  of  its  net  profits  for  the 
following  four  years,  and  in  addition  £200,000.^  The  Imperial 
Tobacco  Company  then  threatened  to  meet  the  American  To- 
bacco Company  in  its  own  territory,  and  during  the  summer  of 
1902  was  reported  to  be  choosing  locations  for  its  American 
plants.  But  in  September,  1902,  before  this  threat  was  carried 
out,  an  agreement  was  entered  into  which  brought  the  struggle  to 
an  end. 

By  this  agreement  the  American  Tobacco  Company  and  its 
allied  concerns  transferred  all  their  business  in  Great  Britain  and 
Ireland  to  the  Imperial  Tobacco  Company.^  This  included,  of 
course,  the  firm  of  Ogden^s.  The  Imperial  Tobacco  Company, 
for  its  part,  agreed  not  to  manufacture  or  sell  tobacco  in  the 
United  States,  except  through  the  American  Tobacco  Company, 
though  it  reserved  the  right  to  buy  tobacco  leaf  in  the  United 
States  for  its  business  in  Great  Britain.  The  American  Tobacco 
CcMnpany  and  the  Imperial  Tobacco  Company  then  united  in  the 
organization  of  a  new  corporation  to  handle  the  tobacco  trade  in 
the  countries  outside  of  the  United  States  (and  its  noncontiguous 

*  Rqx>rt  on  the  Tobacco  Industry,  part  I,  p.  166. 
'  Ibid.,  p.  169. 

*A  copy  of  the  agreement  is  in  the  Report  on  the  Tobacco  Industiy, 
part  I,  pp.  431-447. 


territories)  and  Great  Britain.  The  American  Tobacco  Com- 
pany received  two-thirds  of  the  stock  of  the  new  company,  and 
the  Imperial  Tobacco  Company  one- third.  The  British-Ameri- 
can Tobacco  Company  (the  new  concern)  was  incorporated  in 
Great  Britain  in  1902,  and  it  acquired  all  the  foreign  business  of 
the  American  and  Imperial  Companies.  It  was  provided  that 
the  British-American  Tobacco  Company  could  engage  in  the 
manufacture  of  tobacco  products  in  the  United  States  or  Great 
Britain,  but  solely  for  the  purpose  of  engaging  in  the  export 
trade.  After  this  agreement  was  entered  into  the  British-Ameri- 
can Tobacco  Company  rapidly  developed  its  business  in  foreign 
coimtries,  with  the  result  that  it  established  itself  in  almost 
every  country  where  the  manufacture  of  tobacco  was  not  a 
government  monopoly. 

The  Tobacco  Combination  was  controlled  until  1904  by  the 
Consolidated  Tobacco  Company.  But  on  October  19,  1904,  the 
Consolidated  Tobacco  Company  and  its  two  subsidiary  concerns 
(the  American  and  the  Continental)  were  merged  into  a  single 
company, — the  American  Tobacco  Company.*  This  new  com- 
pany, until  the  dissolution  in  191 1,  remained  the  dominant  con- 
cern in  the  Combination. 

There  were  several  reasons  for  the  change  in  organization. 
In  the  first  place,  the  Northern  Securities  decision,  rendered  in 
1904,  raised  grave  doubts  as  to  the  legality  of  the  Consolidated 
Tobacco  Company,  which,  like  the  Northern  Securities  Com- 
pany, was  a  holding  company.  Secondly,  it  was  hoped  to  im- 
prove the  market  for  the  bonds  of  the  Consolidated  Tobacco 
Company.  These  bonds  had  always  sold  at  a  low  figure.  By 
exchanging  a  part  of  these  bonds  for  6  per  cent  preferred  stock  in 
a  new  company  it  was  believed  that  the  market  for  the  remaining 
bonds  would  be  improved.  Thirdly,  the  insiders  desired  to  con- 
centrate the  control  of  the  entire  business  more  fully  in  the  hands 
of  the  common  stockholders.^  Prior  to  the  merger  of  1904,  the 
preferred  stocks  of  the  American  and  Continental  Companies, 
which  were  largely  held  by  the  outsiders,  had  voting  power, 
although  not  enough  to  outvote  the  conmion  stock  in  these  com- 

^  Report  on  the  Tobacco  Ihdustiy,  part  I,  p.  128.  *  Ibid.,  p.  129. 


panies  held  by  the  Consolidated  Tobacco  Company.  But  by 
the  exchange  of  this  preferred  stock  for  bonds  m  the  reorganized 
American  Tobacco  Company,  and  by  the  issuance  by  the  latter 
company  of  new  6  per  cent  nonvoting  preferred  stock,  given  in 
exchange  for  part  of  the  4  per  cent  bonds  of  the  Consolidated 
Tobacco  Company,  the  power  of  the  insiders  in  the  Combina- 
tion was  made  even  more  secure  than  it  had  been. 

After  the  merger  in  1904  the  same  methods  that  had  been 
used  from  the  beginning  continued  to  be  employed.  This,  the 
Supreme  Court  held,  was  indisputably  established  by  the  record. 
Competitors  were  acquired;  restrictive  covenants  against  en- 
gaging in  the  tobacco  business  were  taken  from  the  sellers;  and 
plants  were  purchased,  not  to  oj)erate,  but  in  order  that  they 
might  be  dismantled.^ 

Thft  j^piffpffln  T'^bacco  Companv^  thg  ^on^^'^^h'ng  factor  in  the 
whole  Tobacco  Combination,  was  contrpjl^  byji  very  few  indi- 
viduals.  At  the  end  of  1906  this  company  had  a  total  capitaliza- 
tion of  $235,191,950,  but  of  this  amoimt  only  the  common  stock, 
representing  about  one-sixth  of  the  total,  had  any  voting  power 
for  the  election  of  directors,  or  for  the  ordinary  affairs  of  manage- 
ment. The  great  bulk  of  the  common  stock  was  owned  by  the 
directors  and  their  associates.  The  twenty-eight  directors  and 
four  other  stockholders  together  owned  77  per  cent  of  the  com- 
mon stock;  indeed,  the  ten  largest  stockholders,  six  of  whom  were 
directors,  together  owned  63  per  cent  of  all  the  common  stock.* 
And  since  the  American  Tobacco  Company  (the  1904  corpora- 
tion) held  a  large  part  of  the  stock  of  the  trusts  or  combinations 
in  the  other  branches  of  the  tobacco  business — the  American 
Snuff  Company,  the  American  Cigar  Company,  the  British- 
American  Tobacco  Company,  and  a  vast  number  of  other  con- 
cans — the  control  of  the  whole  Tobacco  Combinatibn  rested  in 
the  hands  of  a  very  small  number  of  i>ersons.' 

The  historical  development  of  the  various  tobacco  combina- 

>  221  U.  S.  174-175- 

*  Rqx>rt  on  the  Tobacco  Industry,  part  I,  pp.  202-203. 
'  For  a  list  of  the  subsidiary  companies  in  the  Tobacco  Combination  in 
1906,  ace  Report  on  the  Tobacco  Industry,  part  I,  pp.  212-218. 


tions  and  trusts  has  been  briefly  outlined.  It  has  been  seen  that 
these  combinations  upon  their  establishment  generally  possessed 
a  high  degree  of  control  over  the  industry.  To  what  extent  was 
this  control  maintained?  From  lack  of  more  recent  reliable  data 
we  must  make  use,  for  the  most  part,  of  the  figures  contained  in 
the  reports  of  the  Commissioner  of  Corporations  on  the  Tobacco 

The  position  of  the  tobacco  trust  in  the  cigarette  and  little 
cigar  business  combined  for  the  years  1891-1906  is  shown  in  the 
following  table  (the  records  of  the  Bureau  of  Internal  Revenue 
do  not  show  the  production  of  these  products  separately  until 
1898) : 

Total  Output  of  Cigarettes  and  LrrrLs  Cigars,  and  Proportion 
Thereof  Made  by  the  Tobacco  Coicbination,  1891-1966  * 


Per  cent 


Per  cent 



made  by 



made  by 







1891  .. 



1899  . . 



1892  ,. 



1900  . . 



1893  .. 



1901  . . 



1894  .. 



1902  . . 



1895  . 



1903  . 



1896  .. 



1904  .. 



1897  .. 



1905  ■• 


83  9 

1898  . . 



1906  . . 



In  1891  the  trust  produced  88.9  per  cent  of  the  cigarettes  and 
little  cigars  made  in  this  country.  In  1892  and  1893  its  propor- 
tion declined,  reaching  85.3  per  cent  in  the  latter  year.  This  was 
in  spite  of  the  acquisition  in  1892  of  the  large  cigarette  business 
of  Hemsheim  Brothers.  By  1895,  largely  through  the  purchase 
of  three  of  the  most  important  little  cigar  concerns  in  the  coun- 
try, the  trust  had  increased  its  control  to  87.3  per  cent.  The 
next  year  the  Drummond  Tobacco  Company  and  the  Liggett 
and  Myers  Tobacco  Company,  plug  manufacturers  with  plants 

^.Report  on  the  Tobacco  Industry,  part  I,  p.  325. 


in  St.  Louis,  engaged  on  a  large  scale  in  the  manufacture  of 
cigarettes,  as  a  measure  of  retaliation  against  the  American 
Tobacco  Company,  which  was  then  conducting  its  destructive 
campaign  for  the  plug  business.  As  showing  the  importance  of 
these  concerns,  the  cigarette  output  at  St.  Louis  increased  from 
twenty  million  cigarettes  in  1895  to  three  himdred  and  eighteen 
million  in  1896.  In  1897  the  sales  of  the  American  Tobacco 
Company  actually  declined.  The  result  was  a  reduction  in  its 
output  from  87.3  per  cent  in  1895  to  80.0  per  cent  in  1897.  The 
competitors  of  the  cigarette  trust  had  thus  given  a  very  good 
account  of  themselves.  But  in  1898  the  Drummond  Tobacco 
Company  was  acquired  by  the  American  Tobacco  Company, 
and  in  1899  the  Liggett  and  Myers  concern  came  into  the  fold; 
and  as  a  result  the  percentage  of  the  American  Tobacco  Com- 
pany rose  from  80.0,  to  which  it  had  fallen  in  1897,  to  89.0  in  1899. 
FrcMn  then  on  until  1903  the  proportion  of  the  trust  declined 
steadily,  falling  to  82.1  per  cent  in  1903.  In  1904  the  percentage 
increased  to  86.6,  in  part  because  of  the  acquisition  of  competi- 
tors; but  by  1906  had  fallen  to  82.3.  Though  greatly  increas- 
ing its  output  since  1891,  the  trust  did  not  quite  hold  its  own, 
and  had  it  not  been  for  the  purchase  of  the  leading  competitors, 
would  undoubtedly  have  lost  very  heavily;  in  fact,  it  is  quite 
likely  that  it  would  have  foimd  itself  imable  to  maintain  its 
monopolistic  position. 

Since  1898  the  figures  are  available  for  cigarettes  and  little 
cigars  separately.  The  important  data  with  respect  to  cigarettes 
axe  shown  in  the  table  on  page  140. 

The  table  calls  for  little  comment.  The  acquisition  of  the 
Drummond,  and  the  Liggett  and  Myers  concerns  in  1898  and 
1899  added  considerably  to  the  trust's  proportion  of  the  cigarette 
business;  and  by  1899  it  was  producing  94.7  per  cent  of  the  total. 
From  then  until  1907  its  percentage  declined  every  year,  with 
the  exception  of  1904.  The  increase  in  1904  was  due  in  large 
measure  to  the  acquisition  in  the  preceding  year  of  the  Wells- 
Whitehead  Tobacco  Company.  The  steady  increase  in  the 
cigarette  business  of  the  independents  up  to  1907  can  be  ex- 
plained in  part  by  the  growing  preference  on  the  part  of  the 


Total  Output  of  Cigabettes,  and  Proportion  Thereof  Made  by 

Tobacco  Combination,  i  898-1910  * 


ooOfOoo  omitted 

Per  cent  made 
by  Combination 






















public  for  Turkish  cigarettes.  These,  except  for  the  cheaper 
grades,  were  largely  made  by  hand,  and  this  naturally  helped  the 
smaller  concerns.  The  independents,  principally  Turks,  Greeks, 
and  Egyptians,  produced  about  half  of  all  the  Turkish  cigarettes 
made  in  this  country.^  After  1907,  however,  the  independents 
lost  ground  relatively;  by  1910  the  trust  was  producing  86.1  per 
cent  of  the  total  output. 

The  figures  just  given  are  for  the  output  of  this  country.  The 
Tobacco  Combination,  however,  was  a  large  exporter  of  cigar- 
ettes— it  was,  in  fact,  practically  the  only  exporter — and  its 
proportion  of  the  output  produced  for  domestic  consumption  was 
somewhat  less  than  its  proportion  of  the  total  output.  Thus, 
whereas  in  1908  it  had  produced  81.8  per  cent  of  the  country's 
output  of  cigarettes,  it  produced  only  76.7  per  cent  of  the  cigar- 
ettes entering  into  domestic  consumption.^ 

After  1898  the  Tobacco  Combination  greatly  increased  its 

*  Report  on  the  Tobacco  Industry,  part  III,  p.  153. 

'  Includes  quantities  in  bonded  warehouses  for  export. 
'  Report  on  the  Tobacco  Industr>%  part  I,  p.  334. 

*  Ibid.,  p.  329;  and  part  II,  p.  43. 



control  over  the  little  cigar  branch.  In  1898  it  had  produced  less 
than  half  of  the  little  cigars;  by  1910  it  produced  over  nine- 
tenths.^  This  strengthening  of  its  position  can  be  ascribed  to 
causes  similar  to  those  which  made  it  possible  for  it  to  maintain 
its  monopolistic  position  in  the  manufacture  of  cigarettes  from 
the  domestic  leaf.  Important  among  these  causes  was  the 
possibility  of  manufacturing  little  cigars  economically  by  the  use 
of  machinery,  and  the  control  by  the  American  Tobacco  Com- 
pany of  the  patented  machines.^ 

The  development  of  the  Combination's  control  over  the  plug 
tobacco  business  is  shown  by  the  table  below: 

Total  Output  of  Plug  and  Twist  Tobacco,  and  Proportion  Thereof 
Made  by  toe  Tobacco  Combination,  1891-1910 ' 



oooyooo  omitted 

Per  cetU 

made  by 



ooojooo  omitted 

Per  cent 

made  by 


1891. . 
1892. . 




1900.  . 
















23  0 


1902. . 

1903  • 

1906. . 


1908. . 















The  total  production  of  plug  tobacco  has  not  increased  in 
prqx)rtion  to  the  increase  in  population,  but  the  Combination 
steadily  increased  its  proportion  of  the  business.  In  1891,  when 
the  American  Tobacco  Company  by  the  purchase  of  the  National 
Tobacco  Works  entered  the  plug  branch,  it  produced  but  2.7 

*  Report  on  the  Tobacco  Industr>',  part  III,  p.  181. 

*  Ibid.,  part  I,  pp.  31, 345- 

*  Ibid, part  III,  p.  49. 

*  Includes  quantities  in  bonded  warehouses  for  export. 


per  cent  of  the  total  output.  The  monopoly  of  the  cigarette 
trade  possessed  by  it  obviously  facilitated  the  expansiou  of  its 
plug  business,  since  the  monopoly  profits  of  the  cigarette  branch 
could  be  used  to  finance  a  campaign  to  push  the  sale  of  its  plug 
tobacco.  This  competitive  campaign  caused  the  American 
Tobacco  Company  losses  exceeding  three  million  dollars  for 
the  years  1895  to  1898/  but  enabled  it  to  increase  its  percent- 
age by  1898  to  23  per  cent  of  the  country's  output.  The 
American  Tobacco  Company  thus  became  the  most  powerfiJ 
concern  in  the  trade.  Toward  the  dose  of  1898  the  Continental 
Tobacco  Company  was  formed;  and  early  in  1899  this  company 
acquired  the  Liggett  and  Myers  Tobacco  Company,  and  the  R.  J. 
Reynolds  Tobacco  Company  (a  concern  with  a  very  large  busi- 
ness in  the  South).  As  a  result  the  Combination's  proportion 
was  increased  to  56.3  per  cent  in  1899,  and  to  62.0  per  cent  in 
1900.  In  almost  every  year  after  1900  the  Combination  in- 
creased its  production  and  its  proportion  of  the  total,  the  per- 
centage having  increased  by  1910  to  84.9.  lu  almost  every  year, 
also,  the  independent  output  declined.  This  decline  in  the  out- 
put of  the  independent  concerns,  stated  the  Commissioner  of 
Corporations,  speaking  of  the  situation  up  to  1907,  "has  been 
almost  wholly  due  to  the  transfer  of  plants  from  the  independent 
ranks  to  those  of  the  Combination."^  A  great  many  of  the 
plants  thus  acquired  were  closed,  and  the  brands  in  many  cases 
were  discontinued. 

The  smoking  tobacco  branch  shows  the  same  general  situation. 
By  means  already  described,  the  Combination  by  1900  had 
effected  control  of  three-fifths  of  the  smoking  tobacco  business. 
Slowly,  but  surely,  after  1900  it  increased  its  hold  on  the  indus- 
try, until  by  1910  it  was  producing  over  three-fourths  of  the  total 
output  of  smoking  tobacco.'  After  1900  the  independent  con- 
cerns, despite  the  purchase  of  several  of  their  number  by  the 
Combination,  materially  increased  their  output,  but  not  at  so 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  367. 

*  Ibid.,  p.  34.     For  details  see  ibid.,  pp.  364-375. 

*  Ibid.,  part  III,  p.  84.  Smoking  tobacco  includes  also  scrap  and  rut 
plug  tobacco. 


rs^id  a  rate  as  the  Combination, — which  was  developing  not 
only  by  internal  expansion,  but  also  through  outside  acquisitions. 

The  production  of  fine-cut  tobacco  is  much  less  than  that 
of  plug  and  smoking  tobacco;  and  it  has,  moreover,  decreased 
since  1890.  The  Combination  increased  its  control  of  fine-cut 
tobacco  from  50.5  per  cent  in  1900  to  81.7  per  cent  in  1905;  and 
this  percentage  was  substantially  maintained  thereafter,  the  pre- 
cise figure  for  1910  being  79.7  per  cent.^ 

As  already  described,  with  the  organization  of  the  American 
Snuff  Company  in  1900  the  Tobacco  Combination  secured 
control  of  four-fifths  of  the  country's  output  of  snuff.  This 
control  was  gradually  increased,  and  by  1910  the  trust  produced 
96.5  per  cent  of  the  total  output.*  The  growth  since  1901  can 
be  explained  in  part  by  the  absorption  of  competing  concerns, 
but  it  was  due,  in  the  main,  to  the  increased  output  of  the  con- 
cerns already  owned.  The  Tobacco  Combination's  position  in 
the  snuff  business  was  more  monopolistic  in  1910  than  in  any 
other  branch  of  the  tobacco  industry. 

In  striking  contrast,  as  shown  by  the  table  on  page  144, 
stands  the  cigar  industry.  The  Tobacco  Combination  for  some 
time  previous  to  1910  produced  only  about  one-seventh  of  the 
dgars  made  in  this  country;  and  was  not  able  to  increase  this 
percentage.  It  had  thousands  of  competitors,  many  of  whom 
(^)erated  on  an  exceedingly  small  scale.  Unless  satisfactory 
machinery  can  be  invented,  and  the  exclusive  patent  rights  on 
its  manufacture  can  be  obtained  by  the  Combination,  this  one 
field  of  the  tobacco  industry,  in  all  likelihood,  will  remain  open 
to  independent  endeavor. 

That  the  tobacco  industry  in  all  the  leading  branches  except 
cigars  was  controlled  up  to  the  dissolution  decree  (191 1)  by  a 
trust  or  a  union  of  trusts  has  been  shown.  By  what  means  was  it 
able  to  maintain  this  control? 

One  thing  is  dear.  The  Combination  was  not  able  to  maintain 
its  position  by  virtue  of  the  ownership  or  control  of  the  leaf 
tobacco, — the  most  important  raw  material.  The  American 
Tobacco  Company  controlled,  it  is  true,  a  few  companies  pro- 

•  Report  on  the  Tobacco  Industry,  part  III,  p.  127.         '  Ibid.,  p.  138. 


Total  Output  op  Cigars,  and  Proportion  Thereop  Made  by  the 

ToBACxro  Combination,  1898-1910  * 


ooOjOOO  omitted 

Per  cent  made 
by  Combination 




































ducing  leaf  tobacco  in  Cuba  and  Porto  Rico,  but  it  did  not — ^nor 
did  any  other  important  manufacturer — engage  in  the  raising  of 
tobacco  in  the  United  States.^  In  this  respect,  therefore,  it 
presents  a  striking  contrast  to  the  steel  and  oil  trusts.  The 
Tobacco  Combination  endeavored,  to  be  sure,  to  restrain  the 
operation  of  the  law  of  supply  and  demand  in  the  purchase  of 
its.  leaf  tobacco,  but  it  did  not  obtain  nor  endeavor  to  obtain 
permanent  control  over  the  production  of  the  raw  material 
Clearly  there  would  be  little  advantage  to  it  in  making  the 
attempt,  since  the  large  amount  of  land  that  might  be  devoted 
to  tobacco  culture  would  render  the  failure  of  the  attempt 

The  Tobacco  Combination,  however,  did  have  a  well-nigh 
complete  monopoly  of  the  manufacture  of  licorice  paste  in  this 
country.  Licorice,  next  to  leaf  tobacco,  is  the  most  important 
raw  material  used  in  the  manufacture  of  tobacco  products.  It  is 
used  mainly  in  the  manufacture  of  plug  tobacco,  but  also  in  the 
manufacture  of  smoking  tobacco  and  snuff.     The  American 

*  Report  on  the  Tobacco  Industry,  part  III,  p.  192. 
'  Ibid.,  part  T,  p.  48. 


Tobacco  Company,  through  the  MacAndrews  and  Forbes 
Company,  produced  in  1907,  95  per  cent  of  the  total  output  of 
licorice  p)aste.*  The  control  of  the  licorice  branch  served  to 
strengthen  greatly  the  Combination's  control  of  the  tobacco 

Other  important  subsidiaries  of  the  American  Tobacco  Com- 
pany were  the  Conley  Foil  Company  and  the  Johnston  Tin  Foil 
and  Metal  Company,  manufacturers  of  tin  foil;  the  Golden  Belt 
Manufacturing  Company,  producer  of  cotton  bags  to  be  used  in 
packing  tobacco;  the  Mengel  Box  Company,  manufacturer  of 
wooden  boxes;  several  companies  making  machinery  to  be  used 
in  tobacco  manufacture,  or  holding  patents  on  machines;  the 
Kentucky  Tobacco  Product  Company,  which  made  nicotine 
extracts  out  of  tobacco  stems,  the  main  by-product  of  tobacco 
manufacture;  and  the  Manhattan  Briar  Pipe  Company,  manu- 
facturer of  pipes  and  smokers'  supplies.^ 

Neither  was  the  Combination's  monopolistic  position  the 
result  of  railway  rebates, — ^a  factor  of  so  great  importance  in 
building  up  the  Standard  Oil  Company.  Because  of  the  fact  that 
tobacco  products  have  generally  a  large  value  in  small  bulk,  the 
item  of  transportation  cuts  little  figure  in  the  relative  position 
of  competing  tobacco  concerns. 

It  would  undoubtedly  be  a  mistake,  furthermore,  to  attribute 
the  trust  to  the  tariff.  The  duties  on  manufactured  tobacco 
products,  it  is  true,  have  been  relatively  high,  and  this  has 
restrained  foreign  competition.  But  the  imports  would  hardly 
be  considerable  in  any  event.  The  United  States  is  the  largest 
producer  of  leaf  tobacco  in  the  world;  and  though  it  imports 
some  high  grade  leaf  tobacco,  chiefly  for  cigars,  it  exports  huge 
quantities.  The  abundant  raw  material  thus  gives  to  this 
coimtry  a  great  advantage.  The  tobacco  trust,  in  fact,  is  a  large 
exporter  of  cigarettes;  in  1906  about  one-third  of  the  total  out- 
put of  cigarettes  was  exported.^    The  trust's  ability  to  hold  the 

*  Brief  for  the  United  States  in  United  States  v.  American  Tobacco  Com- 
pany (nos.  118,  119),  p.  13. 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  24. 
•Ibid.,  p.  57. 


foreign  markets  indicates  that  it  would  be  able  successfully  to 
meet  foreign, competition  here.  The  export,  as  well  as  the  im- 
port, of  other  tobacco  products,  however,  is  Insignificant.* 

When  we  come  to  consider  the  part  played  by  the  economies 
of  the  trust  form  of  organization,  we  are  on  uncertain  ground. 
That  the  plants  of  the  Combination,  generally  speaking,  were 
very  much  larger  than  those  of  the  independents  is  certain.  This 
was  true  of  every  branch  of  the  tobacco  industry.  We  may  take, 
first,  the  cigarette  branch.  In.  1906  the  tobacco  trust  manufac- 
tured 5,309,000,000  cigarettes,  or  82.5  per  cent  of  the  country's 
output.  Of  this  amount,  4,240,000,000,  or  four-fifths  of  its 
output,was  produced  in  three  plants,  located  at  New  York  City, 
Richmond,  Virginia,  and  Durham,  North  Carolina.*  One  plant 
alone — the  factory  of  the  British-American  Tobacco  Company 
at  Durham — ^made  1,921,000,000  cigarettes,  which  was  over  one- 
third  of  the  trust's  output,  and  almost  30  per  cent  of  the  output 
of  the  whole  country. 

This  concentration  of  output  was  not  confined  to  the  factories 
of  the  trust.  In  the  same  year  (1906)  there  were  528  independent 
plants  (the  large  number  was  due  to  the  fact  that  Turkish  cigar- 
ettes are  often  made  by  hand).  Yet  six  of  these  plants  together 
produced  over  three-fifths  (61.9  per  cent)  of  the  total  independ- 
ent output,  or  more,  therefore,  than  all  the  remaining  522  com- 
bined.^ Twelve  more  yielded  24.6  per  cent  of  the  total  independ- 
ent output.  This  means  that  18  of  the  528  plants  turned  out 
86.5  per  cent  of  the  total  output  of  the  independents.  Yet  in 
spite  of  this  concentration  the  independent  plants  were  much 
smaller  than  the  trust's  plants.  Two  of  the  trust  plants  produced 
more,  and  one  produced  almost  as  much,  -as  all  of  the  inde- 
pendents put  together.  Whatever  advantage  might  be  derived 
from  size  belonged,  therefore,  to  the  trust.  But,  of  course,  the 
vital  question  is  not,  could  the  trust  produce  more  cheaply 
than  its  competitors — that  it  c5uld  do  so  is  hardly  to  be  ques- 
tioned— ^but  could  these  big  plants  of  the  trust  produce  more 

'  Report  on  the  Tobacco  Industry,  part  I,  p.  57. 

'  Ibid.,  p.  340. 



cheaply  by  virtue  of  the  fact  that  they  were  united  under  one  . 
ccmtroL    In  other  words,  was  the  low  cost  of  producing  cigar- 
ettes by  the  trust  due  to  the  size  of  its  plants  or  was  it  due  to  the 
union  of  these  plants? 

On  this  point  it  is  difficult  to  return  a  definite  answer.    We 
may  refer,  however,  to  the  results  of  the  investigation  of  the 
Bureau  of  Corporations  into  the  comparative  costs  of  the  To- 
bacco Combination  and  of  its  successor  companies  after  the 
enforcement  of  the  dissolution  decree.^   From  this  investigation 
it  appears  that  the  factory  costs  of  producing  cigarettes  for  the 
trust  were  $1.74  per  thousand  in  1909,  and  $1.70  per  thousand 
in  1910;  while  the  factory  costs  for  the  companies  that  succeeded 
the  trust  were  $1.66  per  thousand  in  both  1912  and  1913.^   The 
slight  reduction  in  costs  effected  by  the  companies  when  sepa- 
rated from  each  other  was  due  largely  to  lower  leaf  costs  in  191 2 
aud  1913.   If  we  deduct  leaf  costs,  the  factory  costs  were  practi- 
cally the  same  in  each  one  of  these  years:  54  cents  per  thousand  in' 
1909,  55  cents  in  1910,  54  cents  in  191 2,  and  52  cents  in  1913.' 
This  shows,  to  quote  the  Bureau,  "that  so  far  as  manufacturing 
cost  is  concerned  the  question  of  relative  economy  relates  pri- 
marily to  the  size  of  the  factory  units  and  not  to  the  merger  of  ' 
many  factories  and  companies  into  a  huge  consolidation."  *   Or 
again:  "It  is  evident  .  .  .  that  the  decisive  factor  in  factory 
costs  other  than  leaf  has  been  volume  of  output  of  a  particular 
brand  at  a  single  factory  and  that  the  status  of  the  organization 
— that  is,  whether  the  factories  were  in  a  general  consolidation  or 
not — ^is  a  subordinate  factor."  ^    This  conclusion  of  the  Bureau, 
it  should  be  said,  did  not  relate  to  the  cigarette  branch  alone;  it 
was  meant  to  appl^a»  well  to  the  tobacco  business  as  a  whole. 

The  plug  plants  of  the  trust  were  also  distinctly  larger  than 
those  of  the  independent  concerns.  In  1906  the  trust  had  8  plug 
plants  with  an  output  of  5,000,000  pounds  or  more  each.*  These 
plants  turned  out  91.4  per  cent  of  its  total  production  of  plug. 
Yet  two  of  these  eight  plants  produced  59.4  per  cent  of  the 

*0n  the  dissolution  proceedings,  see  ch.  18.  *  Ibid.,  p.  15. 

'  Report  on  the  Tobacco  Industry,  part  III,  p.  324.         '  Ibid.,  p.  16. 
*  Ibid.,  p.  326.  •  Ibid.,  part  I,  p.  376. 


trust's  output,  and  48.7  per  cent  of  the  country's  output.  The 
independents,  on  the  other  hand,  had  no  plants  as  large  as  any 
of  these  eight;  the  larger  independents  had  all  been  acquired 
by  the  trust.  Forty-two  and  a  half  per  cent  of  the  independent 
production  was  produced  in  the  seven  plants  having  an  out- 
put of  1,000,000  pounds  or  more,  and  50.8  per  cent  in  the 
forty-four  plants  producing  between  100,000  pounds  and 
1,000,000  pounds.  The  balance  (6.7  per  cent)  was  produced  in 
the  remaining  plants,  129  in  number.' 

The  aforementioned  investigation  of  the  Bureau  of  Corpora- 
tions shows  for  the  plug  business  that  the  factory  costs  of  the 
companies  that  succeeded  the  trust  upon  its  dissolution  were 
less  than  the  costs  of  the  trust  itself.  These  factory  costs  were  as 
follows:  20.0  cents  per  pound  in  1909;  19.5  cents  in  1910;  18.1 
cents  in  1912;  and  18.5  cents  in  1913.*  But  the  leaf  costs  of  the 
successor  companies  were  distinctly  less  in  191 2  and  1913  than 
those  of  the  trust  in  1909  and  1910;  and  this  explains  all  the 
decline  in  factory  costs.  In  fact,  if  we  deduct  leaf  costs,  the 
factory  costs  of  the  successor  companies  were  actually  greater, 
yet  by  a  very  small  fraction.  It  seems  to  be  clear,  therefore, 
that  so  far  as  factory  costs  were  concerned,  it  was  not  the  trust 
itself  that  was  principally  responsible  for  the  low  production 
costs;  it  was  rather  the  tremendous  size  of  its  plants. 

What  has  been  said  of  the  cigarette  and  plug  branches  applies 
substantially  to  the  others,^  though  especial  mention  may  be 
made  of  the  cigar  branch. 

With  respect  to  cigars,  the  Tobacco  Combination  in  1906  had 
two  plants  making  over  50,000,000  cigars,  the  average  output  of 
these  two  plants  for  that  year  being  about  190,000,000.'  There 
were  no  independent  plants  producing  as  many  as  50,000,000 
cigars;  hence  the  Combination  had  easily  the  two  largest  plants. 
Over  one-third  of  its  output,  in  fact,  was  produced  in  these  two 

*  Report  on  the  Tobacco  Industry,  part  III,  p.  224. 

*  On  smoking  tobacco  see  Report  on  the  Tobacco  Industry,  part  I,  pp.  391- 
396,  part  II,  pp.  251-256;  on  snuflF  see  part  I,  pp.  402-406,  part  II,  pp.  307- 


*  Report  on  the  Tobacco  Industry,  part  I,  p.  425. 


plants.  But  these  plants  produced  largely  cheroots  and  small 
cigars,  rather  than  the  ordinar>'  domestic  cigars.  When  we  turn 
to  the  remaining  cigar  plants  of  the  Combination — 44  in  num- 
ber— ^we  find  that  they  were  of  widely  varying  sizes;  and  that 
many  of  them  were  much  smaller  than  a  number  of  the  independ- 
ent plants.  It  is  true  that  the  average  output  of  the  Combina- 
tion's cigar  plants  exceeded  by  many  times  the  average  output  of 
the  independent  factories,  but  in  considerable  measure  this  was 
due  to  the  existence  of  some  25,000  cigar  factories  turning  out  a 
very  small  output.  Except  for  its  two  largest  factories,  the  Com- 
bination had  no  great  advantage  with  respect  to  size  over  its 
larger  competitors.  Were  size  as  important  as  for  the  other 
branches,  the  Combination  would  doubtless  have  acquired  its 
leading  competitors,  and  thus  have  strengthened  its  position  in 
this  respect.  But  size  was  not  vital  in  this  branch,  and  for  this 
reason  apparently  the  Combination  was  not  able  to  establish 
monopoly  control.  The  mere  possession  of  80  to  90  per  cent  of 
the  cigar  manufacture  would  not  enable  it  to  fix  monopoly  prices 
for  any  length  of  time;  the  increase  of  independent  production 
would  be  certain,  and  with  it  monopoly  control  would  be  lost. 

The  report  of  the  Bureau  on  costs  does  not  take  up  the  cigar 
branch,  and  for  this  reason  a  comparison  can  not  be  made  of  the 
costs  of  the  cigar  plants  of  the  Combination  before  and  after  the 

The  foregoing  discussion  indicates  that  the  size  of  the  plant  is 
the  determining  factor  in  the  cost  of  production,  and  that  the 
dissolution  proceedings,  since  they  left  the  big  plants  intact,  did 
not  aflfect  materially  the  factory  costs.  But  the  situation  is 
otherwise  as  to  selling  costs.  The  subdi\'ision  of  the  business  pro- 
vided for  in  the  dissolution  decree  led  to  a  duplication  of  selling 
organization  and  an  increased  overhead  expense;  and  the  result 
was  a  general  increase  in  selling  costs.  Thus,  the  selling  costs  of 
the  trust  in  all  branches  except  cigars  amoimted  in  1910  to 
$7,191,676,  while  in  1913  the  selling  costs  of  the  companies  that 
succeeded  to  its  business  amoimted  in  the  same  branches  to 
$9,818,746,  an  increase  of  over  two  and  a  half  million  dollars.^ 
*  Report  on  the  Tobacco  Industry,  part  III,  p.  17. 


In  every  branch,  except  flat  plug  and  Turkish  cigarettes^  the 
selling  costs  showed  an  increase.  Based  on  the  rates  per  thou- 
sand or  per  pound,  the  selling  costs  of  the  successor  companies  in 
1913  in  the  cigarette  branch  were  55  per  cent  greater  than  for  the 
trust  in  1910;  91  per  cent  greater  in  the  little  dgar  branch;  1 1  per 
cent  greater  in  navy  plug;  39  per  cent  greater  in  plug-cut  smok- 
ing; 40  per  cent  greater  in  granulated  smoking;  44  per  cent 
greater  in  fine-cut  chewing;  and  46  per  cent  greater  in  snuff. 
The  selling  costs  of  the  successor  companies  for  flat  plug  and 
Turkish  cigarettes,  on  the  other  hand,  were  only  76  and  83  per 
cent,  respectively,  of  the  costs  of  the  trust  in  these  branches. 

The  advertising  expenditures  of  the  successor  companies  also 
greatly  increased  as  compared  with  the  expenses  of  the  trust 
The  advertising  expenses  of  the  trust  in  1910  in  all  branches 
except  dgars  were  $10,895,132,  while  those  of  the  successor 
companies  in  1913  amounted  to  $23,623,564,  or  more  than 

The  trust  may  likewise  have  effected  some  economies  in  the 
purchase  of  its  supplies.  While  the  American  Tobacco  Com- 
pany manufactured  many  of  the  articles  that  it  needed  in  its 
business,  including  packages,  boxes,  etc.,  it  had  occasion  tb  buy 
large  supplies,  such  as  sugar,  rum,  flavoring  extracts,  stationery, 
machinery,  tools,  and  furniture.  All  of  its  buying,  as  well  as 
that  of  its  affiliated  companies,  such  as  the  American  Snuff  Com- 
pany and  the  American  Cigar  Company,  was  done  for  it  by  one 
concern, — the  Amsterdam  Supply  Company.*  By  buying 
through  one  company  with  its  experienced  purchasing  agents, 
the  trust  was  possibly  able  to  get  some  of  its  supplies  on  more 
advantageous  terms. 

The  trust  also  foimd  the  control  of  patented  machinery  a 
source  of  great  strength.  The  concentration  of  the  manufac- 
ture of  tobacco  in  large  plants  and  the  specialization  of  these 
plants,  to  a  large  degree,  on  particular  brands,  permitted  a  wider 
utilization  of  machine  methods  than  was  possible  for  smaller 
concerns.     The  trust  substituted  machinery  for  hand  labor 

*  Report  on  the  Tobacco  Industry,  part  HI,  p.  18. 
'  Ibid.,  part  I,  p.  265. 


whenever  practicable,  and  it  achieved  its  greatest  success  in  those 
lines  in  which  this  was  done.  In  the  cigarette  and  little  dgar 
branches,  where  practically  all  the  processes  were  performed  by 
machinery,  the  trust,  through  its  control  of  the  patented  ma- 
chines, was  able  to  maintain  a  monopoly  position  more  easily 
than  in  any  other  branch  of  the  tobacco  industry  except  snuff. 
In  the  cigar  branch,  where  machinery  is  least  used,  and  where 
patents  therefore  give  no  advantage,  the  trust  has  been  weakest. 

The  trust,  as  shown  earlier,  also  made  frequent  use  of  the  prac- 
tice of  local  price  discrimination, — the  weapon  so  effectively 
employed  by  the  Standard  Oil  Company.  In  the  localities  where 
independents  sought  a  foothold,  the  trust  frequently  sold  its  so- 
called  "fighting  brands"  at  a  loss;  and  in  this  way  checked  the 
growth  of  the  independent  concerns,  whose  field  of  competition 
was  generally  local.  This  proved  especially  effective,  because  the 
campaign  of  competition  could  be  limited  to  the  comparatively 
few  fighting  brands  held  by  the  trust,  the  prices  of  its  popular 
brands  being  generally  maintained  at  the  former  level.  The 
practice  of  local  price  cutting  touched  as  a  rule,  therefore,  only 
the  fringes  of  the  trust's  vast  business,  but  commonly  affected 
the  total  business  of  the  independents,  and  this  made  it  more 
difficult  for  them  to  bear  the  losses  of  such  a  campaign. 

The  policy  of  local  price  cutting  was  facilitated  through  the 
secret  ownership  of  a  number  of  tobacco  companies.  Many  deal- 
ers and  consumers  had  long  been  opposed  to  trusts  in  general 
and  to  the  tobacco  trust  in  particular.  To  take  advantage  of  this 
attitude  independent  n^anufacturers  frequently  advertised  their 
goods  as  "  not  made  by  a  trust."  The  refusal  of  the  trust  to  deal 
with  labor  organizations  had  engendered  much  hostility  among 
the  trade  unionists  also,  and  many  of  them  refused  to  buy  any 
but  union  made  goods.  Manufacturers  catering  to  this  senti- 
ment were  able  to  develop  quite  a  trade.  In  order  to  meet  this 
dtuation,  the  trust,  especially  during  1903  and  1904,  secretly  se- 
cured a  controlling  interest  in  a  number  of  concerns  catering  to 
the  anti-trust  and  pro-imion  trade.  These  concerns,  after  be- 
ing acquired  by  the  trust,  continued  to  operate  imder  tl^ir 
former  management,  and  pretended  to  be  independent  and  op- 


posed  to  the  trust.  *  Those  which  had  friendly  relations  with  un- 
ion labor  continued  to  maintain  such  relations,  though  the  atti- 
tude of  the  trust  itself  was  one  of  bitter  hostility  to  trade  union- 
ism. These  secretly  controlled  concerns  were,  imtil  the  facts 
became  known,  a  highly  effective  engine  of  warfare  against  the 
real  independents.^ 

The  American  Tobacco  Company  likewise  endeavored  to  con- 
trol the  jobbing  trade.  In  the  cigarette  bi^siness,  for  example,  a 
factor's  agreement,  or  a  consignment  agreement  as  it  was  called, 
was  put  in  operation  in  the  latter  part  of  1895.^  According  to 
this  agreement  the  jobber  to  whom  cigarettes  were  consigned 
agreed  to  sell  only  to  the  retail  trade,  and  to  sell  only  at  the  price 
fixed  by  the  American  Tobacco  Company.  If  the  jobber  did  not 
discriminate  against  the  American  Tobacco  Company's  cigar- 
ettes, and  fully  complied  with  all  the  provisions  of  the  agreement, 
he  was  to  be  given  a  conunission  of  2>^  per  cent  on  the  receipts  of 
his  sales  of  cigarettes.  If,  however,  the  jobber  handled  no  cigar- 
ettes except  those  of  the  American  Tobacco  Company  (and  com- 
plied in  every  respect  with  the  consignment  agreement),  he  was  to 
receive  an  additional  commission  of  7^^  per  cent.  Mr.  Whelan, 
a  wholesale  dealer,  claimed  before  the  Lexow  Committee  (1897) 
that  a  jobber  could  hardly  do  business  without  some  of  the  goods 
of  the  American  Tobacco  Company;  that  2>^  per  cent  allowed 
the  dealer  no  profit;  and  that  there  was,  therefore,  a  very  strong 
incentive  to  agree  to  handle  the  American  Tobacco  Company's 
goods  exclusively.^  This  device  for  holding  the  trade  led  to  ad- 
verse legislation,  and  in  1897  was  abandoned. 

The  ability  of  the  trust  to  require  preference  in  the  sale  of  its 
goods, — to  the  extent  that  it  possessed  such  ability, — ^lay  in  con- 
siderable measure  in  its  exclusive  ownership  of  a  great  majority 

*  Report  of  the  Tobacco  Industry,  part  I,  p.  224. 

*  For  excellent  illustrations  of  the  secret  machinations  of  the  trust,  see 
Transcript  of  Record  in  United  States  v.  American  Tobacco  Company 
(no.  660),  vol.  II,  pp.  524,  640;  and  Report  of  the  Senate  Committee  on 
Control  of  Corporations,  1913,  p.  347. 

'  Lexow  Report,  p.  872.  A  copy  of  the  agreement  is  in  Lexow  Report, 
pp.  878-883. 

*Ibid.,  pp.  991-992. 


of  the  popular  brands  of  tobacco  products.  Some  of  these  brands 
had  became  such  standard  articles  that  dealers  had  to  handle 
them,  or  lose  a  great  deal  of  business  even  in  other  lines.  In  fact, 
the  trust's  monopoly  power  was  to  a  large  extent  founded  on  its 
control  of  the  greater  number  of  the  brands  enjoying  a  high 
degree  of  popular  favor. 

The  tobacco  trust  also  \mdertook  the  retail  distribution  of  i 
products.  This  it  did  largely  through  the  acquisition  of  the 
United  Cigar  Stores  Company.  This  concern  had  been  incorpo- 
rated in  New  Jersey  on  May  16, 1901,  by  persons  having  no  con- 
nection with  the  trust,  to  sell  and  distribute  tobacco  products  at 
retail.^  The  company  proved  so  successful  that  the  American 
Tobacco  Company  acquired  a  controlling  interest  in  it  in  No- 
vember, 1901;  and  thereafter  it  supplied  it  with  the  necessary 
funds  for  eacpansion.^  The  United  Cigar  Stores  Company 
bought  its  products  direct  from  the  American  Tobacco  Company 
and  the  Amerlfetn  Cigar  Company,  instead  of  through  jobbers, 
but  it  handled  the  goods  of  independents  also.  In  1907  the 
United  Company  had  392  stores,  but  subsequently  the  number 
was  much  increased. 

It  is  thus  clear  that  a  great  many  factors  contributed  to  the 
success  of  the  tobacco  trust  in  establishing  and  maintaining  its 
monopolistic  position.  The  great  *^'^^  ^^  ''^*^  plBUt*^^^**  control  of 
the  licoricejiaste,  tariff  p^lection.  the  ownership  of  patents  on 
machinery  used  in  tobacco  manufacture,  the  use  of  local  price 
discrimii)ation  and  bogus  independent  concerns,  numerous  de- 
vices to  control  the  wholesale  and  retail  distribution  of  its  prod- 
uct,— all  helped  it  in  the  competitive  struggle.  Yet  the  growth 
of  the  trust's  control  of  the  tobacco  industry,  according  to  the 
Commissioner  of  Corporations,  "has  been  primarily  due  to  con- 
tinual buying  up  of  independent  concerns."  ^  Frequent  in- 
stances of  sucS^ii'rchases  have  already  been  given.    Their  influ- 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  88. 

*  Brief  for  the  United  States  in  United  States  v,  American  Tobacco  Com- 
pany (nos.  118, 119),  p.  12.  On  December  31, 1906,  the  American  Tobacco 
Company  held  $340,000  of  the  $450,000  common  stock  of  this  company,  and 
ail  of  its  bonds  and  preferred  stock. 

*  Report  on  tlie  Tobacco  Industry,  part  I,  p.  38. 


ence  is  further  shown  by  a  comparison  of  the  number  of  factories, 
with  their  output,  owned  at  diflFerent  periods  by  the  trust  with 
the  number  owned  by  the  independents.  The  years  1897, 1900, 
and  1906  are  significant  years.  From  a  table  given  in  the  report 
of  the  Bureau  of  Corporations  it  appears  that  in  1897  the  trust 
owned  five  plants  producing  chewing  and  smoking  tobacco  and 
snuflF  with  an  output  of  five  million  pounds  each,  while  the  in- 
dependent concerns  had  seven  plants  of  this  size.^  In  1900  the 
independents  had  only  one  such  plant,  all  of  the  remaining  six 
having  been  acquired  by  the  trust,  which  in  that  year  was  oper- 
ating ten  plants  producing  as  much  as  five  million  pounds  each. 
By  1906  the  seventh  independent  plant  had  been  acquired  by 
the  trust,  and  the  trust  had  increased  the  output  of  some  of  its 
smaller  plants,  so  that  it  had  twenty-one  factories  all  told  of  the 
size  mentioned.  There  were  only  two  independent  concerns  pro- 
ducing over  five  million  pounds  in  1906,  two  new  concerns  having 
arisen  with  an  output  of  this  amount  To  quote  from  the  report 
of  the  Bureau,  "despite  enormous  expenditures  for  advertising 
and  in  'schemes'  and  despite  frequent  price  cutting  by  means  of 
its  so-called  'fighting  brands'  and  its  bogus  independent  con- 
cerns, there  has  been,  in  several  branches  of  the  industry,  a  con- 
stant tendency  for  competitors  to  gain  business  more  rapidly  than 
the  Combination  and  thus  to  reduce  its  proportion  of  the  output 
This  tendency  has  been  overcome  only  by  continued  buying  up  of 
competitive  concerns.  Many  weaker  concerns  have  been  vir- 
tually driven  out  of  business  or  forced  to  sell  out  to  the  Combi- 
nation, either  by  reason  of  the  direct  competition  of  the  latter,  or 
as  an  indirect  result  of  the  vigorous  competition  between  the 
Combination  and  larger  independent  concerns.  In  the  case  of 
the  larger  and  more  powerful  concerns  which  it  acquired,  how- 
ever, the  Combination  has  usually  seciured  control  only  by  pay- 
ing a  high  price.  The  immense  profits  of  the  Combination  have 
enabled  it  to  keep  up  this  policy."  * 

What  eflFect  has  the  trust  had  upon  the  prices  of  tobacco  prod- 
ucts? We  may  take  up  first  the  cigarette  branch.  The  Amer- 
ican Tobacco  Company  (the  cigarette  trust)  was  organized  in 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  39.  *  Ibid.,  p.  41. 



1890^  In  what  way  the  establishment  of  this  trust  affected 
prices  can  not  be  said;  the  detailed  data  with  respect  to  the  years 
immediately  following  the  formation  of  the  company  are  not 
obtainable.  The  really  significant  figures,  therefore,  are  lacking. 
The  prices  from  1893  to  1910,  however,  are  available,  and  these 
are  shown  in  the  following  table.  The  prices  are  wholesale,  since 
the  trust  sold  largely  to  jobbers. 

Wholesale  Prices  op  Cigasettes  Received  by  the  Trust  on  rrs 

Domestic  Business,  1893-1910* 




Average  per  thousand 


Net  price 


Net  price 
less  tax 












1902. ..... 


















S3  52 














I  50 
1. 01 
1. 01 
1. 00 

1. 00 

1. 01 










3  40 

Si -74 




1. 00 








1. 21 
1. 00 
I  05 
1. 12 
1. 16 
I  03 

I  07 

I  05 
1. 10 
1. 00 

The  net  price  less  tax  on  all  the  cigarette  business  of  the  trust, 
ezclu^ve  of  exports  and  foreign  output,  averaged  $3.02  per 
thousand  in  1893.  From  then  until  1899  it  steadily  declined, 
reaching  $2.01  in  1899.  This  proved  to  be  the  low  point.  There- 
after imtil  1910  the  price  increased  almost  continuously,  and  in 
that  year  reached  $3.51.   But  the  increase  in  prices  since  1893  or 

'  Rqxnt  on  the  Tobacco  Industry,  part  III,  p.  155. 

*  Indudes  manu£acturing,  selling,  advertising,  and  freight. 



even  since  1899  (the  low  point)  has  not  been  commensurate  with 
the  increase  in  the  cost  of  production;  and  the  profit  in  19 10  was 
less,  therefore,  than  in  either  1893  or  1899.  It  is  diflScult  to  say 
just  what  significance  attaches  to  these  figures.  The  important 
thing,  clearly,  would  be  a  comparison  of  the  range  of  prices  for 
cigarettes  after  the  trust  was  established  in  1890  with  the  range 
prior  to  that  time.  Data  on  this  point  being  lacking,  a  compar- 
ison might  be  made  of  the  prices  charged  for  tobacco  before  and 
after  the  dissolution  of  191 1.  Yet  for  reasons  given  on  page  472 
such  a  comparison  would  not  lead  to  any  definite  conclusions. 

No  conclusions  of  especial  value  can  be  drawn  from  a  study 
of  the  prices  of  little  cigars.  Until  1898  cigarettes  and  little 
cigars  were  grouped  together  in  reports  made  to  the  Bureau  of 
Internal  Revenue,  and  therefore  it  is  not  possible  to  say  what 
proportion  of  the  little  cigar  business  was  controlled  up  to  that 
time  by  the  trust.  In  1898  (when  the  statistics  were  first  sepa- 
rated) the  trust  produced  48.7  per  cent  of  the  little  cigars,  and 
its  control  gradually  increased  until  in  1910  it  was  as  high  as 
91.4  per  cent.  The  net  price  less  tax,  as  the  table  on  page  182  of 
the  report  of  the  Commissioner  of  Corporations  on  Prices  shows, 
was  distinctly  less  in  1910  th^  in  1895  (the  first  year  for  which 
these  statistics  are  available  ^),  and  was  no  higher  than  in  1898 
when  the  Combination  controlled  only  halt  the  little  cigar 
industry.  But  the  cost  meanwhile  had  declined  greatly.  The 
cost  in  1 9 10  was  64  cents  less  per  thousand  than  in  1898,  and  the 
price  about  the  same  as  in  1898.  It  follows  that  the  profit  was 
very  much  larger, — ^in  fact,  it  was  more  than  double.  It  appears, 
therefore,  that  the  trust  was  able  to  maintain  prices;  that  it  pre- 
vented the  reduction  in  prices  which  under  competitive  conditions 
might  be  expected  to  follow  a  considerable  decline  in  the  cost  of 
production.  To  arrive  at  any  definite  conclusions,  however,  we 
should  know  what  prices  and  costs  would  have  been  had  there  never 
been  a  little  cigar  trust,  and  that  of  course  can  not  be  ascertained. 

The  statistics  for  plug  tobacco  are  perhaps  more  significant. 

*  The  American  Tobaccx)  Company  kept  the  statistics  for  its  little  cigar 
business  separately  as  early  as  1895.  Report  on  the  Tobacco  Industry, 
part  in,  p.  182. 



One  reason  is  that  they  are  obtainable  since  1893,  or  several 
years  before  the  formation  of  the  plug  trust.  This  renders  it 
possible,  therefore,  to  make  a  comparison  which  could  not  be 
made  for  the  cigarette  and  little  dgar  branches, — a  comparison 
of  the  prices  immediately  before  and  after  the  organization  of 
the  trust  The  plug  trust  (the  Continental  Tobacco  Company) 
controlled  56.3  per  cent  of  the  business  in  1899,  and  gradually 
increased  this  control  to  81.8  per  cent  in  1906.  The  relation 
between  steadily  increasing  monopolistic  control  and  prices  can 
thus  also  be  pointed  out. 
The  essential  figures  are  shown  in  the  following  table: 

Wholesale  Prices  of  Plug  Tobacco  Received  by  the  Trust, 

1893-1910  ^ 




Average  per  pound 


Net  price 


Net  price 
less  tax 




















1910. . . . 





no. 8 

118. 0 









154  6 









35  4 







































21. 1 









*  2.9 





*  Report  on  the  Tobax:co  Industry,  part  III,  p.  51. 

*  Includes  manufacturing,  selling,  advertising,  and  freight. 


In  1894,  when  there  was  no  important  concentration  of  the 
plug  business  in  the  hands  of  any  one  concern,  the  net  price  less 
tax  averaged  29.1  cents  per  pound.  The  inauguration  by  the 
American  Tobacco  Company  of  its  campaign  for  the  plug  busi- 
ness led  to  severe  cuts  in  prices.  The  existence  and  severity  of 
this  competition  is  shown  by  the  figures  for  1895  to  1898.  The 
average  price  per  pound  fell  from  29.1  cents  in  1894  to  15.5  cents 
u^  1895,  to  12.9  cents  in  1896,  and  to  12.2  cents  in  1897.  In  the 
spring  of  1898  an  agreement  looking  toward  consolidation  was 
reached,  and  largely  as  a  result  the  average  price  for  1898  rose 
to  16.7  cents  per  poimd, — quite  a  bit  higher  than  in  1897.  In 
1899,  the  year  of  the  acquisition  of  the  Liggett  and  Myers  con- 
cern, the  price  rose  to  21.0  cents,  and  in  1900  to  22.8  cents.  As 
the  trust  increased  its  control  year  by  year  the  price  rose,  and 
with  it  the  profit.  By  1901  the  price  had  advanced  to  25.1  cents, 
or  more  than  double  the  price  of  1897;  and  the  profit  was  6.5 
cents  per  poimd  as  compared  with  aloss  of  2.4  cents  in  1897.  By 
1908  the  high-water  mark  in  prices  was  reached  at  30.3  cents, 
the  profit  in  that  year  being  8.0  cents  per  poimd.  The  Contin- 
ental Tobacco  Company  at  this  time  controlled  81.9  per  cent 
of  the  business.  The  year  1908  was  not  the  year  of  maximimi 
profit,  however,  because  the  cost  was  higher  than  in  1903,  whoi 
a  profit  of  9.8  cents  per  poimd  was  attained. 

The  power  and  influence  of  the  trust  is  indicated,  though 
not  proven,  by  the  coiurse  of  prices  during  the  years  1901  to  1903. 
The  internal  revenue  tax  on  plug  tobacco  had  been  12.0  cents 
per  poimd  in  1900.  In  1901  it  was  reduced  to  10.9  cents,  in  1902 
to  7.8  cents,  and  in  1903  to  6.0  cents.  In  ^ite  of  these  marked 
tax  reductions,  the  net  price  (including  tax)  rose  from  34.8  cents 
in  1900  to  36.0  cents  in  1901,  and  by  1903  had  declined  to  only 
35.4  cents.  In  other  words,  during  a  period  when  the  tax  was 
reduced  by  6  cents,  presumably  in  the  interests  of  the  consumer, 
the  price  actually  increased  six-tenths  of  one  cent  The  cost  of 
production  during  these  years  increased  by  exactly  the  same 
amount  as  the  price.  It  is  evident,  therefore,  that  the  consumer 
got  no  benefit  from  the  reduction  in  the  tax;  and  that  he  was 
forced  to  pay  six-tenths  of  a  cent  more  to  compensate  the  trust 


for  the  increase  in  costs, — an  increase  which  exactly  equalled  the 
rise  in  price.  In  view  of  these  facts,  the  profits  of  the  trust  must 
have  greatly  increased.  The  profit  per  pound  had  been  3.8  cents 
in  1900;  in  1903  it  was  9.8  cents,  or  over  150  per  cent  greater. 

The  remission  of  the  internal  revenue  taxes  on  the  other 
tobacco  products  during  1901  and  1902  had  substantially  the 
same  result;  the  trust  absorbed  the  gains  (or  practically  all  of 
them)  that  were  presimiiably  intended  for  the  consimners  of 

In  1910  the  reverse  situation  appeared  in  part*  In  that  year 
the  internal  revenue  tax  was  increased  somewhat  all  along  the 
line,  and  this  added  burden  was  largely  borne  by  the  trust. 
While  in  the  smoking  and  fine-cut  branches  prices  were  ad- 
vanced, these  increases  being  passed  along  by  the  jobber  to  the 
consumer,  in  the  cigarette,  little  dgar,  plug,  and  snuflf  branches, 
the  trust  advanced  its  price  to  the  jobber  but  slightly,  and  the 
jobber  absorbed  the  increase,  leaving  the  price  to  the  consumer 
imchanged.^  The  trust  might  have  reduced  the  quantities  of 
these  products  in  the  retail  packages^  as  it  did  in  the  smoking 
tobacco  and  fine-cut  branches,  but  this  would  generally  have 
doubled  the  profits, — a  step  that  did  not  seem  advisable, 
e^)edally  in  view  of  the  pending  dissolution  suit. 

Similar  price  statistics  are  available  for  smoking  tobacco, 
snuffy  and  dgars.  However,  it  would  burden  the  record  imduly 
to  insert  them  here.  Yet  a  comparison  of  the  snuff  and  dgar 
businesses  with  re^)ect  to  thdr  profits  is  of  great  significance.  Of 
all  the  branches  of  the  tobacco  industry,  the  snuff  branch  is  the 
most  highly  monopolized,  while  the  dgar  branch  is  the  only  one 
the  trust  has  been  unable  to  dominate.  The  table  on  page  160 
shows  for  the  trust  in  these  two  lines  the  percentage  of  the  price 
which  represented  profits  (not  the  profit  per  pound  or  per 

During  the  years  1901-1910,  from  54.1  per  cent  to  73.7  per 
cent  of  the  price  of  snuff  stood  for  cost,  and  from  45.9  per  cent  to 
26.3  per  cent  represented  profit.    For  cigars  (leaving  out  of  con. 

>  Rqx>rt  on  the  Tobacco  Industry,  part  ni,  p.  7. 
*  Ibid.,  pp.  142, 199. 


Rate  of  Profit  (percentage  that  profit  was  of  the  price)  on  Snuff 

AND  Domestic  Cigars,  1900-19 io 



cigars  ^ 

















44  9 

II. 2  ' 



10. 0 

3  9 


sideration  the  years  1 901-1904,  when  the  tobacco  trust  was 
trying  to  capture  the  cigar  business)  the  cost  of  manufacture 
ranged  from  89.3  per  cent  to  96.1  per  cent  of  the  price,  and  the 
profit,  therefore,  ranged  from  3.9  per  cent  to  10.7  per  cent  of 
the  price.  If  we  take  the  year  1906  (when  the  profits  in  the 
cigar  branch  were  greatest),  it  appears  that  the  rate  of  profit  in 
the  highly  monopx)lized  snuff  business  exceeded  the  rate  of  profit 
in  the  competitive  cigar  industry  by  well  over  four  times.  A 
similar  comparison  made  for  the  other  branches  would  show  that 
the  trust's  rate  of  profit  in  the  cigarette,  plug,  smoking  tobacco, 
and  little  cigar  business  exceeded  its  rate  of  profit  in  the  domestic 
cigar  business  by  three,  three,  two  and  a  half,  and  two  times, 
respectively.'  It  is  also  significant  that  the  cigar  branch  was 
the  only  one  in  which  the  price,  either  with  or  without  tax, 
showed  a  declining  tendency  during  the  ten  years  ending  in  191a 
The  net  price  less  tax  on  the  trust's  domestic  cigars  averaged 
$27.83  per  thousand  in  1901,  and  only  $24.50  in  1910.  The  bear- 
ing of  these  figures  on  the  general  question  of  monopoly  versus 
competition  is  obvious. 

*  Excludes  stogies,  cheroots,  and  package  cigars. 


'  Report  on  the  Tobacco  Industry,  part  TIT,  p.  200. 


The  price  tables  presented  above  are  for  wholesale  prices, — 
the  prices  paid  by  jobbers.  Th.e  prices  paid  by  consumers  during 
this  p>eriod  did  not  increase  in  anything  like  the  same  proportion; 
in  fact,  during  the  period  from  1901  to  July,  1910,  there  were 
practically  no  changes  in  the  retail  prices  of  the  trust's  principal 
brands  of  cigarettes,  little  dgars,  and  manufactured  tobacco.^ 
It  follows,  therefore,  that  dxiring  this  period  the  trust  was 
gradually  encroaching  upon  the  margin  between  the  jobber's 
and  the  consimier's  price.  In  part  this  may  be  explained  by  the 
trust's  policy  of  performing  itself  to  a  large  extent  the  function 
of  pushing  the  sale  of  its  goods  (thus  reducing  the  jobbers*  ex- 
penses and  making  it  possible  for  them  to  get  along  on  a  lower 
margin).    In  part  also  it  testified  to  the  great  power  of  the  trust. 

We  turn  next  to  an  analysis  of  the  profits  of  the  tobacco 
trust  The  table  on  page  162  shows  for  the  American  Tobacco 
Company  the  earnings  and  dividends  on  the  common  stock  for 
the  years  1890  to  1903  (in  1904  the  American  Tobacco  Company 
and  the  Continental  Tobacco  Company  were  merged). 

The  earnings  of  the  American  Tobacco  Company  have  been 
handsome,  and  especially  in  the  early  years.  The  average  for  the 
nine  years  1890  to  1898,  embracing  a  period  of  severe  industrial 
depression,  was  17.7  per  cent,  not  counting  the  profits  realized 
from  the  sale  of  the  plug  business  to  the  Continental  Tobacco 
Company.  If  these  are  included,  the  earnings  averaged  as  high 
as  25.7  per  cent.^  The  declaration  of  a  100  per  cent  stock  divi- 
dend in  1899  natin-ally  reduced  the  rate  of  earnings,  yet  in  spite 
of  this  dilution. of  the  stock  as  much  as  13.8  per  cent  was  earned 
in  1903. 
I  The  dividends  paid  were  also  liberal.  In  the  fourteen  years 
'  prior  to  the  merger,  the  dividends  declared  on  the  common  stock, 
including  stock  dividends  and  scrip,  averaged  about  15  per  cent 
per  annimi.  This  common  stock  was  largely  water.  |  At  its  organ- 
ization in  1890  the  American  Tobacco  Company  had  issued  $10,- 
000,000  preferred  stock  and  $15,000,000  common.  According  to 
the  Bureau  of  Corporations,  the  tangible  assets  of  the  five  com- 

*  Rqx)rt  on  the  Tobacco  Industry,  part  III,  p.  7. 
«  Ibid.,  part  11,  p.  58. 


Eaknings  and  Dividends  of  American  Tobacco  Company  on| 

Common  Stock,  1890-1903  ^ 

Profits  OMiUibU  for  distribu- 
tion on  common  stock  after 
paying  dividends  on  preferred 
stock  and  interest  on  scrip 


Common  stock 



Rate  of  divi- 
dend paid  on 
common  stock 


2 1 ,000,000 













II. 4 


17. 8« 


13  8 










"""^O  •  •  •  • 



•  '"^•r 


20. o* 















■■y"*  11* 


10. 0 





panics  which  united  to  form  the  trust  aggregated  $3,545,108,  and 
the  good  will  (which  was  recognized  as  a  legitimate  factor  in  the  in- 
vestment, because  it  had  generally  been  built  up  by  large  expendi- 
tures for  advertising,  etc.)  certainly  did  not  exceed  $8,954,892.* 
As  a  very  liberal  estimate  the  value  of  the  business  (allowing  for 
the  $1 ,825,354  in  notes  given  by  the  organizers)  was  only  $14,325,- 
000,  and  property  of  this  amoimt  was  represented  by  $10,000,- 
000  of  8  per  cent  preferred  stock  and  by  $15,000,000  of  common 

^Original  Petition  in  United  States  v.  American  Tobacco  Company, 
pp.  78-84,  and  Report  on  the  Tobacco  Industiy,  part  II,  p.  57. 

*  Does  not  include  the  profits  received  from  the  sale  of  the  plug  business. 

'  9  per  cent  paid  in  cash;  20  per  cent  in  scrip,  afterward  redeemed  at  its 
face  value,  with  interest  at  6  per  cent  from  May  i,  1896. 

*  Includes  100  per  cent  stock  dividend. 

*  Report  on  the  Tobacco  Industiy,  part  11,  pp.  8-9. 


stock.  Over  two-thirds  of  the  common,  therefore,  was  water. 
Thus,  the  American  Tobacco  Company,  though  paying  10  per 
cent  dividends  in  1890,  was  actually  paying  at  least  34  per  cent 
on  the  value  of  that  part'  of  its  property  which  stood  back  of  the 
conmion  stock.  The  fact  that  it  was  able  from  the  very  start  to 
pay  excellent  dividends  on  its  whole  capitalization  indicates 
that  a  high  degree  of  monopolistic  control  had  been  efiFected. 

Similar  data  might  be  presented  in  detail  for  the  Continental 
Tobacco  Company  from  1899  to  1903;  for  the  Consolidated 
Tobacco  Company  from  1901  to  1904;  and  for  the  reorganized 
American  Tobacco  Company  from  1904  to  1908.  It  will  suffice 
to  point  out  that  even  on  the  capitalization  basis  the  earnings  of 
these  companies  and  the  dividends  paid  were  very  liberal.  The 
reorganized  American  Tobacco  Company,  for  example,  earned  on 
its  conmion  stock  during  the  years  1905  to  1910  an  average  of 
over  50  per  cent;  and  paid  dividends  averaging  over  29  per  cent.^ 

The  foregoing  statistics  give  a  fairly  satisfactory  idea  <rf  the 
profits  of  the  trust.  But  for  two  reasons  they  do  not  portray  the 
situation  accurately.  In  the  first  place,  the  capitalization  was  an 
arbitrary  figure;  and,  in  the  second  place,  the  earnings  were  not 
the  actual  earnings,  but  merely  those  shown  on  the  companies' 
books.  The  Bureau  of  Corporations  therefore  attempted  in  its 
elaborate  investigation  of  the  profits  of  the  tobacco  business  to 
ascertain  as  acciuately  as  it  could  the  investment  and  the  actual 
earnings, — that  is,  to  determine  what  the  money  invested  in  the 
tobacco  manufacture  had  really  earned.  Space  is  not  available 
to  present  the  results  of  this  study;  ^  it  must  suffice  to  say  that 
after  1901,  by  which  date  effective  control  had  been  secured  over 
practically  all  branches  of  the  tobacco  industry,  the  earnings  of 
the  tobacco  trust  on  its  entire  business  closely  approximated  the 
large  profits  obtained  by  the  American  Tobacco  Company  dur- 
ing the  earlier  period  when  it  almost  completely  monopolized  the 
cigarette  business. 

^  Moody's  Manual,  191 1,  p.  2696.  No  dividends  were  paid  in  1904,  the 
year  in  whidi  the  American  Tobacco  Company  was  organized. 

*The  interested  reader  is  referred  to  Report  on  the  Tobacco  Industry, 
part  n  (Capitalization,  Investment,  and  Earnings). 



Practically  all  of  the  shoes  now  made  in  this  country  are  manu- 
factured by  machinery.  In  1915  there  were  over  1,500  manufac- 
turers  of  shoes  scattered  throughout  the  country,  producing 
annually  in  the  aggregate  more  than  300,000,000  pairs  of  machine- 
made  shoes.  A  very  important  group  of  these  machines  is  that 
used  to  prepare  and  attach  the  soles  to  the  uppers, — a  process 
known  in  the  trade  as  bottoming.  The  more  important  of  the 
bottoming  machines,  without  which  factory  shoes  can  not  profit- 
ably be  made,  are  the  lasting  machines^  the  welt-Sfi3Kinglnadiiii^> 
the  outsole-stitching  machines,  THe  heeling  m^chifles,  and  the 
metallic-fastening  machines.^  By  the  year  1899,  throughapcoc- 
§55  ofjcpmbination,  there  had  developed  a  dominating  concern 
in  the  manufacture  of  each  one  of  these  groups  of  machines.  The 
Consplidated  and  McKay  Lasting  Machine  Company  under 
letters  patent  manufactured  60  per  cent  of  the  lasting  ma- 
chines made  in  this  country ;  the  Goodyear  Shoe  Machinery  Com- 
pany produced  80  per  cent  of  the  outsole-stitching  machines, 
and  10  per  cent  of  the  lasting  machines;  and  the  McKay  Shoe 
Machinery  Company  made  70  per  cent  of  the  heeling  ma- 
chines, and  80  per  cent  of  the  metallic-fastening  machines.* 

'  On  the  United  Shoe  Machinery  Company  see:  Original  Petition  in  United 
States  V.  United  Shoe  Machinery  Company  in  the  district  court  of  the 
United  States  for  the  eastern  district  of  Missouri;  Brief  for  the  United  States 
in  United  States  v.  United  Shoe  Machinery  Company  (no.  207);  227  U.  S. 
202-218;  222  Fed.  Rep.  349-415;  247  U.  S.  32-91;  264  Fed.  Rep.  138-175; 
Report  of  the  Senate  Committee  on  Interstate  Commerce  on  the  Control  of 
Corporations,  1913;  Hearings  on  Trust  I.«egislation  held  before  the  House 
Committee  on  the  Judiciary,  1913-T914;  Roe,  Journal  of  Political  Economy, 
21,  pp.  938-953,  and  22,  pp.  43-63- 

'  For  a  description  of  (hese  machines  and  of  the  process  of  shoe  manufac- 
ture, see  Brief  for  the  United  States  (no.  207),  pp.  7-15. 

'  See  227  U.  S.  215.    Mr.  Winslow,  president  of  the  United  Shoe  Machin- 




The  heads  of  the  Consolidated  Company  and  the  Goodyear  Com- 
pany in  negotiations  begun  in  1898  discussed  a  "working  agree- 
ment" between  the  two  companies,  but  this  proposed  arrange- 
ment was  given  up  because  of  the  objections  of  the  head  of  the 
Goodyear  Company.  This  gentleman,  who  was  a  lawyer,  "  had 
a  sort  of  indefinite  idea  that  it  might  be  deemed  to  be  a  combina- 
tion in  restraint  of  trade,"  and  he  therefore  insisted  upon  a  com- 
plete consolidation,  the  illegality  of  which  (as  a  device  for  organ- 
izing trusts)  was  less  certain  at  that  time.^ 

Accordingly  on  February  7,1899,  the  United  Shoe  Machinery 
Company  was  incorporated  in  New  Jersey  with  an  authorized 
capital  stock  of  $25,000,000.  The  new  company  acquired  all  the 
stock  of  the  three  concerns  mentioned  above,. as  well  as  four 
other  concerns,  to  wit,  the  International  Goodyear  Shoe  Ma- 
chinery Company,  the  Davey  Pegging  Machine  Company,  the 
Eppler  Welt  Machine  Company,  and  the  International  Eppler 
Welt  Machine  Company.^  These  companies  conveyed  to  the 
United  Company  all  of  their  business,  including  their  patent 
rights  in  the  United  States  and  foreign  countries.^  The  United 
Company  thus  became  an  operating  concern.  It  soon  concen- 
trated the  manufacture  of  its  machines  at  a  new  plant  in  Beverly, 
Massachusetts;  and  here  the  greater  number  of  its  machines 
are  now  made.  The  effect  of  the  combination  of  1899,  accord- 
mg  to  counsel  for  the  government,  was  to  give  one  concern  con- 
trol over  70  to  80  per  cent  of  the  total  output  of  bottoming  room 
machinery  (the  company,  it  should  be  noted,  did  not  secure 
control  of  the  machinery  used  in  the  sole  leather  room,  the 
stitching  room,  or  the  finishing  room).^  After  its  organization 
the  United  Company  acquired  some  fifty  other  concerns  manu- 
facturing shoe  machinery  or  supplies.^  As  the  result  of  the 
original  combination  and  subsequent  acquisitions  the  United 
Company  obtained  a  complete  line  of  the  principal  and  auxiliary 

cry  Company,  testified  that  the  McKay  Shoe  Machinery  Company  produced 
nearly  all  of  the  heeling  and  metallic-fastening  machines  that  were  being 
made  in  the  United  States.    247  U.  S.  81. 

*  247  U.  S.  77. 

*Ibid.,  38-39.  *  227  U.  S.  205. 

'Ibid.,  39.  •  Brief  for  the  United  States  (no.  207),  p.  67. 


machines  used  in  the  bottommg  of  shoes.  Formerly,  as  stated 
above,  certain  companies  had  held  a  monopolistic  position  with 
respect  to  individual  bottoming  room  machines,  but  no  one 
had  a  full  line,  and  no  one  has  a  full  line  at  the  present  time, 
except  the  United  Shoe  Machinery  Company.^ 

Not  only  is  the  United  Company  the  only  American  concern 
possessing  a  full  line,  but  it  has  a  highly  monopolistic  position  in 
the  manufacture  of  the  leading  bottoming  room  machines, — and 
it  is  with  respect  to  bottoming  room  machinery  that  the  contro- 
versy of  the  government  with  the  United  Company  deals.  In 
the  Brief  for  the  United  States  there  is  an  exhibit  that  shows 
the  number  of  principal  bottoming  machines  (together  with 
clicking  machines)  which  the  United  Company  and  its  competi- 
tors had  out  on  March  i,  1911.^  This  exhibit  is  reproduced  be- 
low, the  percentages  being  supplied  by  the  author. 

Machines  put  out  to  Shoe  Manufacturers  in  the  United  States, 

March  i,  191  i 

Per  cent  of 

Machines                                 By  defendants  By  all  others  competition 

Clicking  machines 3,65s  none  0.00 

Pulling-over  machines 1,632  none  0.00 

Lasting  machines ' 7496  7  o.oi 

Standard  screw  machines ' 409  none  0.00 

Pegging  machines  • 146  none  0.00 

Tacking  machines  • 3^88  6  0.02 

Welt-sewing  machines  • 2,527  142  5 .30 

Outsole-stitching machines ' 2,676  758  22.07 

Loose-nailing  machines  * 1,835  24  i  .30 

Heeling  machines  • 2,019  17  0.83 

Slugging  machines 1,876  23  i .  21 

McKay  sewing  machines 898  8  0.87 

28,657  98s  3.44 

*  Brief  for  the  United  States  (no.  207),  p.  134. 

*  This  table  was  constructed  from  the  uncontradicted  evidence  of  eighty- 
five  witnesses,  from  an  exhibit  of  the  United  Company,  and  from  other 
sources.    See  Brief  for  the  United  States  (no.  207),  p.  150. 

'  The  figures  for  these  machines  are  reproduced  in  the  (pinion  of  Justice 
Oai^e  (247  U.  S.  89),  who  states  that  they  are  not  seriously  disputed  by 
counsel  for  the  United  Shoe  Machinery  Company. 


From  this  table  it  appears  that  in  only  one  bottoming  room 
machine — the  outsole-stitching  machine — did  the  United  Shoe 
Machinery  Company  have  important  competition.  The  inde- 
pendent companies  made  (1911}  22.07  P^^  ^^^^  ^^  ^^  outsole- 
stitching  machines;  and  the  United  Company  made  77.93  per 
cent.  Of  every  other  machine  the  United  Company  made  at 
least  94  per  cent,  and  in  some  cases  100  per  cent.  Taking  all 
these  machines  together  the  trust  made  96.56.  per  cent.  The 
petition  of  the  government  even  charged  that  the  United  Com- 
pany  made  gS}4  per  cent  of  the  machinery  and  supplies  used  in 
the  bottoming  of  shoes.^ 

In  addition  the  shoe  machinery  trust  had  a  very  strong  hold 
on  the  business  of  foreign  countries.^  The  British  United  Shoe 
Machinery  Company  supplied  all  of  the  installed  shoe  machinery 
equipment  in  Ireland,  practically  all  in  Scotland,  and  some  So 
per  cent  in  England.  Other  affiliated  companies  furnished  90 
per  cent  of  the  shoe  machinery  equipment  of  Italian  factories, 
and  75  per  cent  of  that  of  French  factories.  United  machines 
were  sold  also  in  Germany,  Austria,  Belgium,  Russia,  Denmark, 
Norway,  Sweden,  Spain,  Switzerland,  and  undoubtedly  other 

To  what  may  be  the  ability  of  the  United  Shoe  Machinery 
CcHnpany  to  attain  a  monopolistic  position  in  the  industry  be 
attributed?  It  can  not  be  ascribed  to  tariff  barriers.  There 
have  been  duties  on  the  importation  of  shoe  machinery  (though 
none  since  1913),  yet  the  ability  of  the  United  Company  to  com- 
pete so  effectively  in  foreign  lands  shows  conclusively  that  its 
strong  position  at  home  is  not  to  be  explained  in  this  way. 
Neither  does  it  appear  to  have  benefited  by  railway  favors. 
Furthermore,  no  monopoly  of  a  natural  resource  has  been 
effected.    To  what,  then,  may  it  be  attributed? 

In  the  first  place,  the  strength  of  the  shoe  machinery  trust 
was  due  to  the  original  act  of  combination  in  1899.    The  mere 

*  Original  Petition  in  United  States  v.  United  Shoe  Machinery  Company, 
pp.  15-16. 

*  See  the  Shoe  and  Leather  Trade  series  of  the  Department  of  Conunerce 
and  Labor,  1912-19x3. 


union  under  one  management  of  a  group  of  concerns,  each  of 
which  had  a  dominant  position  in  its  special  line  of  bottoming 
room  machinery,  gave  the  United  Company  a  substantial 
monopoly  of  all  such  machinery.  A  vital  question  is  the  proper 
public  policy  to  be  adopted  with  respect  to  such  combinations. 
In  this  connection  the  remarks  of  the  Supreme  Court  are  of 
interest.  Speaking  of  the  organization  of  the  United  Shoe 
Machinery  Company  in  1899  it  said:  "On^e  face  of  it  the  cgn- 
bination  was  simply  an  effort  after jpeater  efficiency.  The  busi- 
ness of  the  several  groups  that  combined,  as  it  existed  before  the 
combination,  is  assumed  to  have  been  legal.  The  machines  are 
patented,  making  them  a  monopoly  in  any  case  .  .  .  and  it 
may  be  assumed  that  the  success  of  the  several  groups  was  due 
to  their  patents  having  been  the  best.  As,  by  the  interpretation 
of  the  indictment  below,  195  Fed.  Rep.  591,  and  by  the  admis- 
sion in  argument  before  us,  they  did  not  compete  with  one 
another,  it  is  hard  to  see  why  the  collective  business  should  be 
any  worse  than  its  component  parts.*  It  is  said  that  from  sev- 
enty to  eighty  per  cent,  of  all  the  shoe  machinery  business  was 
put  into  a  single  hand.  This  is  inaccurate,  since  the  machines  in 
question  are  not  alleged  to  be  types  of  all  the  machines  used  in 
making  shoes,  and  since  the  defendants'  share  in  commerce 
among  the  States  does  not  appear.  But  taking  it  as  true  we  can 
see  no  greater  objection  to  one  corporation  manufacturing  sev- 
enty per  cent,  of  three  noncompeting  groups  of  patented  ma- 
chines collectively  used  for  making  a  single  product  than  to  three 

^  In  this  case  the  Supreme  Court  did  not  find  that  the  companies  combined 
were  noncompeting;  it  merely  accepted  the  construction  put  on  the  indict- 
ment by  the  lower  court.  But  in  247  U.  S.  41, 47,  the  Court  (four  judges)  did 
assert  that  the  companies  that  united  to  form  the  United  Shoe  Machinery 
Company  were  not  competitive.  However,  the  dissenting  opinion  (three 
judges)  declared  that  some  of  the  companies  were  competitive,  and  intro- 
duced testimony  of  the  leading  officials  of  the  company  that  substantiated 
this  contention  (247  U.  S.  82-83).  The  matter  is  highly  important  smce  the 
decision  of  the  Supreme  Court  turned  on  this  point.  By  the  majority  opinion 
the  United  Shoe  Machinery  Company  was  declared  to  be  in  essence  a  union 
of  several  patent  monopolies,  which  was  not  forbidden  by  the  Sherman  Act, 
For  a  discussion  of  the  decisions  of  the  Supreme  Court,  see  pp.  431, 4^2. 


corporations  making  the  same  proportion  of  one  group  each. 
The  disintegration  aimed  at  by  the  statute  does  not  extend  to 
reducing  all  manufacture  to  isolated  units  of  the  lowest  degree. 
It  is  as  lawful  for  one  corporation  to  make  every  part  of  a  steam 
engine  and  to  put  the  machine  together  as  it  would  be  for  one  to 
make  the  boilers  and  another  to  make  the  wheels."  ^ 

The  law  is  thus  clear.  The  United  Shoe  Machinery  Company 
combined  in  1899  a  number  of  noncompeting  concerns,  and  es- 
tablished a  monopoly  of  a  very  important  line  of  shoe  machinery. 
But  the  patent  law  contemplates  and  permits  monopoly,  hence 
the  act  of  combination  was  not  illegal.    In  other  words  we  are 

dealing  here^'tl^  a  pa,^^"^  tniQt^ — g  trust  .AiippnrfrpH  hy  Ipgjgla- 

tion.  Without  criticizing  the  principle  of  our  patent  legislation 
it  must  be  clear  that  the  existence  and  power  of  the  United  Shoe 
Machinery  Company  does  not  necessarily  lend  support  to  the 
argument  that  trusts  inevitably  evolve  because  of  their  superior 
efficiency.  The  United  Shoe  Machinery  Company  would  appear 
to  have  evolved  because  a  monopoly  was  profitable,  and  sanc- 
tioned by  law. 

As  to  the  economics  of  the  matter,  there  are,  as  a  matter  of 
course,  more  or  less  plausible  argimients  advanced  for  a  shoe 
machinery  trust  protected  by  patents  (as  there  are  for  every 
other  trust),  as,  for  example,  the  following:  "Shoe  manu- 
facturing had  become  a  highly  complicated  industry.  In 
making  Goodyear  welt-shoes,  one  hundred  and  eighty-five 
distinct  operations  were  necessary,  of  which  one  hundred  and 
fifty-seven  were  machine  operations.  Few  machines  could  per- 
form more  than  one  or  two  of  these  operations.  In  every  shoe 
factory,  therefore,  a  great  many  different  machines  had  to  be 
assembled,  adjusted  to  work  in  absolute  harmony,  and  kept  in 
perfect  operation.  If  any  machine  broke  down  or  got  out  of 
adjustment,  the  industrial  chain  was  broken,  and  all  the  machin- 
ery in  the  factory  had  to  stand  idle  until  the  broken  link  was 
restored.  The  shoe  mamufacturer,  consequently,  was  always 
at  the  mercy"3his  weakest  machine.    His  product  was  always 

*  227  U.  S.  217-218.  The  validity  of  the  leases  with  their  tying  clauses 
(see  pp.  171  ff.)  was  not  before  the  court  in  this  case. 


limited  by  the  delay  and  inadequacy  of  the  service  furnished  by 
the  weakest  manufacturer  from  whom  he  obtained  machinery. 
Every  other  machinery  manufacturer,  whose  machines  were 
prevented  from  earning  royalties  during  this  enforced  idleness, 
was  also  a  sufiferer.  He,  no  less  than  his  customer,  was  always  at 
the  mercy  of  the  weakest  machines  in  his  customer's  factory. 
His  royalties  from  his  machines  were  alwa}^  limited  by  the  delay 
and  inadequacy  of  the  service  which  his  competitor  furnished  to 
their  conmion  customer. 

"Such  instability  could  not  endure.  Breakdowns  multiplied; 
repair  bills  became  intolerable;  continuous  operation  was  never 
certain;  production  costs  could  never  be  predicted;  promises  of 
definite  deliveries  could  not  be  fulfilled;  machines  bought  out- 
right soon  became  worthless;  large  customers  demanded  and 
frequently  obtained  rebates  over  their  smaller  competitors; 
enforced  idleness  caused  by  inefiScient  machinery  service  re- 
sulted in  frequent  turmoils  of  factory  operatives;  an  up-to-date 
shoe  factory  involved  such  large,  unforeseeable  outlajrs  as  to 
become  almost  a  financial  impossibility."  ^ 

However  accounted  for,  it  gradually  came  about  that  the  mak- 
ing of  machinery  for  the  bottoming  operations  in  shoe  manufac- 
ture centered  in  three  noncompeting  groups.  The  movement 
might  have  stopped  there.  The  concentration  of  the  bottoming 
machinery  in  the  hands  of  three  concerns  would  have  obviated 
many  of  the  difficulties  referred  to  above,  as  it  would  naturally 
have  been  to  the  decided  interest  of  each  of  these  concerns  to 
permit  continuous  use  of  their  machines.  But  the  movement 
went  on,  and  in  1899,  as  we  have  seen,  the  three  groups  united 
to  form  the  United  Shoe  Machinery  Company.  The  forma- 
tion of  this  company  was  legal,  and,  according  to  the  Supreme 
Court,  "  on  the  face  of  it  simply  an  effort  after  greater  efficiency." 
Probably  efficiency  would  have  been  equally  promoted,  and  the 
public  interest  better  protected,  by  the  existence  side  by  side  of 
several  concerns,  each  making  a  full  line  of  bottoming  machinery, 
though  one  must  not  speak  too  dogmatically  on  the  basis  of 

*  Roe,  Journal  of  Political  Economy,  21,  pp.  941-^2.  For  the  opposing 
view  see  Brief  for  the  United  States  (no.  207),  pp.  226-229. 


present  knowledge.  Furthermore,  it  would  be  quite  possible, 
if  public  opinion  is  opposed  to  patent  trusts,  to  have  the 
federal  government  acquire  the  patent  rights  on  its  own  accoimt, 
and  throw  open  the  invention  to  general  use,  due  compensation 
being  made  to  the  inventor  to  reward  him  for  his  labor  and  finan- 
cial outlays.  While  invention  will  be  stimulated  and  industrial 
progress  promoted  by  proper  encouragement  in  a  financial  way 
to  inventors,  it  is  by  no  means  certain  that  that  encouragement 
could  not  be  given  without  permitting  at  the  same  time  the 
establishment  of  patent  monopolies.^  If  then  it  appeared  that 
it  were  more  efficient  for  all  the  machinery  in  a  given  shoe  fac- 
tory to  be  owned  by  one  company,  it  would  still  be  possible  for 
individual  manufacturers  to  lease  all  their  machinery  from  one 
company,  with  the  alternative,  however,  of  turning  to  other 
manufacturers  upon  the  expiration  of  the  leases,  in  the  event 
that  the  service  was  not  satisfactory.  By  this  arrangement  the 
government  would  hold  the  patents,  and  active  competition  in 
the  business  of  manufacturing  shoe  machinery  and  supplying 
shoe  machinery  service  would  be  possible,  as  it  is  not  now,  be- 
cause of  the  fact  that  many  of  the  essential  patents  are  owned 
by  one  company. 

In  the  second  place,  the  strength  of  the  United  Shoe  Machin- 
ery Coii^pany  was  the  result  of  the  so-called  tying  clauses  in  its 
leases.  iThe  United  Company  did  not  sell  its  principal  machines; 
it  merely  leased  them  to  shoe  manufacturers  at  a  royalty  of  so 
much  per  pair  of  shoes.  The  provisions  of  the  leases  are  very 
important,  and  deserve  detailed  consideration.  For  this  purpose 
we  shall  take  the  leases  for  lasting  machines, — one  of  the  essen- 
tial machines. 

Hie  principal  provisions  of  the  lasting  machine  leases  are  (in 
substance  and  condensed  form) :  ^ 

Sec.  I.    The  leased  machinery  shall  at  all  times  remain  the 

^  It  should  be  realized  that  a  monopoly  in  shoe  machinery  of  certain  types 
is  Ukely  to  discourage  invention,  since  there  will  be  no  competition  for  the 
product  of  the  inventor,  and  his  reward  will  therefore  be  limited. 

*  A  copy  of  a  lasting  machine  lease  is  in  the  Report  of  the  Senate  Commit- 
tee on  the  Control  of  Corporations,  pp.  31 70-21 74. 


exclusive  property  of  the  lessor  (the  United  Company).  The 
lessor  and  its  agents  and  employees  shall  at  all  times  be  given 
access  to  the  leased  machinery  for  the  purpose  of  inspecting  it, 
watching  its  operation,  repairing  it,  or  determining  the  extent  of 
its  use. 

Sec.  2.  The  lessee  (the  shoe  manufacturer)  shall  at  his  own 
expense  keep  the  leased  machinery  in  good  working  order.  He 
shall  obtain  from  the  lessor  exclusively,  and  shall  pay  therefor 
at  the  regular  prices  from  time  to  time  established  by  the  lessor,^ 
all  the  duplicate  parts  and  extras  needed  in  operating  or  repairing 
the  leased  machinery. 

Sec.  5.  The  leased  machinery  shall  be  used  for  no  other  pur- 
pose than  for  lasting  shoes  or  other  footwear  made  by  or  for  the 
lessee.  The  leased  machinery  shall  not,  nor  shall  any  part 
thereof,  be  used  in  the  manufacture  of  any  welted  shoes  or  other 
footwear,  or  portions  thereof,  which  have  been  or  shall  be  welted 
in  whole  or  in  part,  or  the  soles  of  which  have  been  stitched,  by 
the  aid  of  any  welt-sewing  or  sole-stitching  machinery  not  held 
by  the  lessee  under  lease  from  the  lessor;  or  in  the  manufacture 
of  any  turned  shoes  or  other  footwear  or  portions  thereof,  the 
soles  of  which  have  been  or  shall  be  in  whole  or  in  part  attached 
to  their  uppers  by  the  aid  of  any  turn-sewing  machinery  not 
held  by  the  lessee  under  lease  from  the  lessor;  or  in  the  manu- 
facture of  any  shoes  or  other  footwear  which  have  or  shall  be  in 
whole  or  in  part  pulled  over,  slugged,  heel  seat  nailed,  or  other- 
wise partly  made  by  the  aid  of  any  pulling-over  or  "Metallic" 
machinery  not  held  by  the  lessee  under  lease  from  the  lessor. 
Subject  to  the  foregoing  limitations,  the  lessee  shall  use  the 
leased  machinery  to  its  full  capacity  upon  all  shoes  or  other  foot- 
wear, or  portions  thereof,  made  by  or  for  the  lessee  in  the  manu- 
facture of  which  such  machinery  is  capable  of  being  used. 

Sec.  6.  The  lessee  shall  pay  to  the  lessor  as  royalty  the  sum  of 
I  1/4  cents  for  each  pair  of  shoes  or  portion  thereof  lasted  by  the 
aid  of  the  leased  machinery. 

Sec.  8.  If  at  any  time  the  lessee  shall  fail  or  cease  to  use 
exclusively  *  lasting  machinery  held  by  him  under  lease  from  the 
*  Italics  supplied  by  the  author.  '  Ibid. 


lessor  for  lasting  all  shoes  m^de  by  him  or  for  him  which  are 
lasted  by  the  aid  of  machinery,  the  lessor  may  at  its  option  ter- 
minate forthwith,  by  notice  in  writing,  any  or  all  leases  of  lasting 
machines 'then  existing  between  the  lessor  and  the  lessee;  and 
the  possession  of  the  lasting  machine  shall  thereupon  be  revested 
in  the  lessor  free  from  any  claims  whatever. 

Sec.  9.  This  lease  shall  continue,  unless  sooner  terminated  by 
the  lessor  because  of  breach  thereof  on  the  part  of  the  lessee,  for 
seventeen  years.  But  if  any  breach  shall  be  made  in  the  observ- 
ance of  any  one  or  more  of  the  conditions  contained  herein  or 
contained  in  any  other  lease  subsisting  between  the  lessor  and 
the  lessee,  the  lessor  shall  have  the  right,  by  notice  in  writing 
to  the  lessee,  to  terminate  forthwith  any  or  all  ^  leases  to  use 
machinery  then  in  force  between  the  lessor  and  the  lessee.  Upon 
the  expiration  of  this  lease  or  its  termination  by  notice,  the  lessee 
shall  forthwith  deliver  the  leased  machinery  to  the  lessor  at 
Beverly,  Massachusetts,  in  good  order;  and  shall  thereupon 
pay  to  the  lessor  the  simi  of  $150  in  respect  to  each  lasting 
machine  hereby  leased,  as  partial  reimbursement  for  deteriora- 
tion of  the  leased  machinery. 

Sec.  10.  In  case  at  any  time  the  lessee  shall  have  in  his  posses- 
sion more  lasting  machines  than,  in  the  opinion  of  the  lessor,  are 
needed  to  perform  the  work  which  the  lessee  has  for  such  ma- 
chines, the  lessor  may,  upon  thirty  days*  notice  in  writing,  termi- 
nate the  lease  to  use  any  one  or  more  of  the  lasting  machines 
hereby  leased.  In  case  any  lease  is  thus  terminated,  the  lessee 
shall  pay  to  the  lessor  such  simi  as  may  be  necessary  to  put  such 
machine  or  machines  in  suitable  condition  to  lease  to  another  lessee. 

Sec.  13.  The  lessee  admits  the  validity  for  the  full  term  ex- 
pressed in  the  grant  thereof  of  each  of  the  Letters  Patent  of  the 
United  States  owned  by  the  lessor. 

The  provisions  of  this  lease  bear  witness  to  the  power  of  the 
United  Shoe  Machinery  Company.  Shoe  manufacturers  would 
hardly  have  submitted  to  such  conditions  had  it  not  been  largely 
a  matter  of  necessity.  It  should  be  borne  in  mind,  however, 
that  it  is  not  the  leasing  system  itself  that  is  the  subject  of  com- 

^  Italics  supplied  by  the  author. 


plaint;  rather  it  is  the  t3dng  clauses  contained  in  the  leases. 
The  leasing  system,  in  fact,  possesses  distinct  advantages,  partic- 
ularly to  the  manufacturer  of  shoes  operating  on  a  compara- 
tively small  scale.  Were  it  necessary  for  a  shoe  maniffacturer  to 
buy  his  shoe  machinery,  it  would  require  considerable  capital  to 
engage  in  the  business.  As  it  is,  the  machines,  with  all  that  is 
involved  in  the  way  of  invention  costs,  depreciation,  care  of 
machines,  cost  of  administration,  are  supplied  to  the  shoe 
manufacturer  at  a  comparatively  small  royalty  per  pair  of 
shoes.  The  evidence  is  that  the  United  Company  has  given  the 
same  terms  and  the  same  service  to  every  shoe  manuf actiu^r,  no 
matter  whether  he  was  doing  business  on  a  large  scale  or  on  a 
small  scale;  that  a  larger  capital  has  never  availed  to  secure  any 
favoritism  with  respect  to  machines  and  machine  service.^  As 
the  result  of  this  policy  competition  has  continued  quite  active  in 
the  shoe  industry. 

Since  it  is  not  the  practice  of  leasing  machinery  that  is  com- 
plained of,  but  rather  the  tying  clauses  in  the  leases,  it  will  be 
advisable  to  consider  more  fully  the  nature  of  these  tying  clauses 
and  their  significance. 

According  to  section  five  of  the  lasting  machine  lease  described 
above  a  shoe  manufacturer  leasing  a  lasting  machine  from  the 
United  Shoe  Machinery  Company  obligated  himself  not  to  use 
that  machine  in  the  manufacture  of  shoes  which  have  been  or 
shall  be  welted  in  whole  or  in  part  with  the  aid  of  any  wdt-sew- 
ing  machinery  not  held  by  the  manufacturer  imder  lease  from 
the  United  Company;  nor  in  the  manufacture  of  shoes,  the  soles 
of  which  have  been  in  whole  or  in  part  stitched  with  the  aid  of 
sole-stitching  machinery  not  leased  from  the  United  Company; 
nor  in  the  manufacture  of  turned  shoes,  the  soles  of  which  have 
been  or  shall  be  in  whole  or  in  part  attached  to  their  uppers  with 
the  aid  of  any  tiun-sewing  machinery  not  leased  from  the  United 
Company;  nor  in  the  manufacture  of  shoes  which  have  been  or 
shall  be  in  whole  or  in  part  pulled  over,  slugged,  or  heel  seat 
nailed  with  the  aid  of  any  machinery  not  leased  from  the  United 

*  Report  of  the  Senate  Committee  on  Control  of  Corporations,  pp.  1160, 
1964,  2159. 


Company.  The  crux  of  the  whole  matter  is  that  the  shoe 
manufacturer  had  to  have  a  lasting  machine;  for  all  practi- 
cal purposes  he  could  get  one  only  from  the  United  Shoe  Ma- 
chinery Company;  ^  and  if  he  leased  one  from  the  company — it 
would  not  sell  him  one  under  any  circumstances — he  had  to  agree 
to  use  certain  other  machines  of  the  company,  notably  the 
welter,  stitcher,  and  metallic-fastening  machines.  That  is,  to 
the  essential  machines,  like  the  laster,  other  machines  were 
tied.  These  other  machines  might  not  be  as  good  as  those  of 
competing  shoe  machinery  manufacturers — it  is  not  intended,  of 
course,  to  say  that  they  were  not — ^but  if  the  shoe  manufacturer 
wished  to  use  a  laster  he  had  but  little  choice.  This,  in  effect,  re- 
strained him  in  the  use  of  competing  shoe  machinery.  The  gov- 
ernment in  its  petition  asking  that  the  court  declare  these  tying 
dauses  ill^al  under  the  Clayton  Act  ^  charged  that  competitors 
of  the  United  Company  were  prepared  to  supply  certain  kinds  of 
shoe  machinery  at  lower  prices  or  royalties  than  were  asked  by 
the  United  Company,  but  that  the  shoe  manufacturers  were  de- 
terred from  buying  or  leasing  them  by  the  tying  clauses,  and  by 
the  fear  of  the  serious  financial  consequences  that  would  attend 
their  violation.^  Competition  in  the  manufacture  of  shoe  ma- 
chinery was  thus  rendered  largely  impotent  by  the  tying  clauses. 
Coimsel  for  the  United  Shoe  Machinery  Company  has  stated 
the  theory  of  the  tying  clauses:  "The  fimdamental  machines  are 

'President  Winslow  testified  that  "after  the  formation  of  the  United 
Company  it  was  manufacturing  every  single  lasting  machine  that  was 
being  put  out  in  the  United  States  except  the  Seaver  machine;  and  in  1900  we 
acquired  the  Seaver  Company"  (247  U.  S.  81).  At  the  time  of  the  govern- 
ment suit  only  one  other  concern — the  R.  H.  Long  Machinery  Company — 
professed  to  put  out  lasting  machines.  Yet  this  company  had  put  out  only 
four,  and  it  was  by  no  means  in  a  position  to  supply  all  the  requisite  types  of 
lasting  machines.  That  being  the  case  it  could  not  become  a  competitor  of 
any  consequence,  since  all  of  the  United  Company  lasting  machine  leases 
cootained  an  exclusive  use  clause,  which  required  the  shoe  manufacturer  to 
obtain  all  of  his  lasting  machinery  from  the  United  Company.  Brief  for  the 
United  States  (no.  207),  pp.  177-178. 

•Sec  p.  476. 

*  Oii^nal  Petition  in  United  States  v.  United  Shoe  Machinery  Company, 
p.  12. 



the  stitcher  and  welter,  which  attach  the  upper  to  the  inner  sole 
and  the  outer  sole  to  the  welt.  To  those  fundamental  machines 
other  machines  are  tied.  A  man  can  have  a  stitcher  and  a  welter 
and  not  be  required  to  take  a  single  other  machine,  and  he  can 
acquire  by  purchase  a  great  number  of  other  machines  without 
being  required  to  take  a  stitcher  or  a  welter.  But  if  he  takes  a 
stitcher  and  a  welter  and  also  wants  to  take  a  lasting  machine 
he  is  required  to  use  that  lasting  machine  only  on  shoes  which 
are  stitched  and  welted  on  the  company's  stitcher  and  welter."  ^ 
According  to  counsel  a  shoe  manufacturer  could  have  a  stitcher 
and  welter,  and  need  take  no  other  machine.*    But  he  had  to 

have  a  lasting  machine,  and  if  he  took  one — as  he  must  if  he  is  to 


manufacture  shoes — ^he  was  required  in  effect  to  use  not  only  the 
company's  stitcher  and  welter,  but  a  number  of  other  machines, 
none  of  which  might  be  used  except  in  connection  with  the 
company's  lasting  machines.  The  privilege,  therefore,  of  xising 
the  company's  stitcher  and  welter  and  no  other  machine  was 
thus  a  hollow  one. 

It  is  important  to  note  that  through  these  tying  clauses  the 
period  of  patent  protection  has  in  effect  been  extended  beyond 
the  time  set  by  law.  A  machine  on  which  the  patent  has  ex- 
pired can  be  tied  to  an  essential  machine  on  which  the  patent 
has  not  expired.  Mr.  Charles  H.  Jones  testified  that  his  com- 
pany was  paying  at  least  $25,000  a  year  royalty  on  machines, 
the  important  patents  on  which  had  already  expired.'  It  would 
appear  that  so  long  as  the  tying  clauses  are  in  force,  the  time 
may  never  come  when  shoe  manufacturers  will  be  free  to  secure 
their  bottoming  machinery  where  they  choose.  In  other  words, 
potential  comp)etition  may  hardly  be  said  to  exist  in  this  industry. 

The  attitude  of  the  shoe  manufacturers  generally  appears  to  be 
one  of  opposition  to  the  tying  clauses.  The  Shoe  Manufacturers' 
Alliance,  comprising  manufacturers  producing  about  40  per  cent 
of  all  the  shoes  produced  in  this  country,  adopted  resolutions  in 

^  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  2166. 
*  The  lessee  of  a  welter  may  not  use  a  competing  stitcher  and  vice  versa. 
Brief  for  the  United  States  (no.  207),  p.  182. 
'  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  2271. 


191 1  urging  the  removal  of  the  tying  clauses  and  the  restoration 
of  competitive  conditions  in  the  shoe  machinery  industry.*  The 
Shoe  Manufacturers'  Association  of  Brockton,  one  of  the  shoe 
centers  of  New  England,  passed  a  resolution  in  191 1  that  the 
association  place  itself  on  record  as  being  in  favor  of  a  continu- 
ance of  the  lease  system  of  the  United  Company,  provided 
such  portions  of  the  leases  as  operated  to  exclude  the  use  of 
competitive  machines  were  abolished,  and  provided  the  penalty 
or  charges  for  returning  used  machinery  were  modified  or  wiped 
out.^  This  association  represented  at  least  10  per  cent  of 
the  shoe  manufacturers  of  the  country.  Mr.  Charles  H.  Jones,  a 
prominent  shoe  manufacturer  in  Boston,  testified  as  follows  be- 
fore a  Senate  investigating  conmiittee : "  I  believe  I  am  well  within 
the  fact  when  I  say  there  are  not  a  dozen  men  in  the  United 
States  engaged  in  the  manufactxure  of  shoes  who  do  not  beUeve 
this  tying  clause  should  be  stricken  out.  They  like  some  of  the 
featwes  of  the  leasing  system  very  much,  but  all  agree  that  these 
things  are  repugnant  to  common  sense  and  good  business  prac- 
tice." » 

— in  1907  the  state  of  Massachusetts  passed  a  bill  to  make  the 
tying  clauses  illegal.  The  act  provided  in  substance  that  no 
person,  firm,  or  corporation  should  make  it  a  condition  of  the  sale 
or  lease  of  any  tool,  appliance,  or  machinery,  that  the  purchaser 
or  lessee  thereof  should  not  buy,  lease,  or  use  machinery,  tools, 
appliances,  material  or  merchandise,  of  any  person,  firm,  or  cor- 
poration other  than  such  vendor  or  lessor;  but  this  provision 
should  not  impair  the  right,  if  any,  of  the  vendor  or  lessor  of  any 
tool,  appliance,  or  machinery  protected  by  a  lawful  patent  right 
vested  in  such  vendor  or  lessor  to  require  by  virtue  of  such  pat- 
ent right  the  vendee  or  lessee  to  purchase  or  lease  from  such  ven- 
dor or  lessor  such  component  parts  of  said  tool,  appliance,  or 
machinery,  as  the  vendee  or  lessee  might  thereafter  require  dur- 
ing the  continuance  of  such  patent  right:  Provided,  that  nothing 
in  the  act  should  be  construed  to  prohibit  the  appointment  of 
sales  agents  to  sell  or  lease  machinery,  etc.'* 

*  Report  of  the  Senate  Committee  on  Control  of  Coiporations,  p.  2266. 
*Ibi(L,  p.  2121.  'Ibid.,  p.  2263.  *  Acts  of  1907,  ch.  469. 


Thereupon  the  United  Company  attached  to  all  its  leases  a 
rider  providing  that  "any  and  all  agreements,  stipulations,  pro- 
visions, and  conditions  hereinbefore  printed  in  this  instrument 
which  are  in  violation  of  the  provisions  of  Chapter  469  of  the 
Acts  of  the  General  Court  of  Massachusetts  for  the  year  1907,  if 
there  are  any  such,  are  hereby  stricken  out  before  execution  and 
are  not  agreed  to  nor  made  a  part  of  this  contract."  ^ 
* — The  Massachusetts  legislation  thus  seems  to  have  had  but 
little  effect.  The  right  reserved  to  the  United  Company  to  can- 
cel all  leases  apparently  deterred  the  shoe  manufacturers  from 
putting  to  the  test  their  undoubted  legal  rights;  for  a  manufac- 
turer who  attempted  to  use  in  part  only  the  essential  machinery 
of  the  United  Company  ran  the  risk  of  ruin. 

In  1914,  as  part  of  the  anti-trust  legislation  of  that  year,  the 
federal  government  enacted  a  similar  prohibition.  This  topic 
will  be  discussed  in  chapter  XV. 

The  United  Shoe  Machinery  Company  has  laid  a  great  deal 
of  emphasis  upon  the  excellence  of  its  machines  and  of  its  serv- 
ice; and  there  can  be  no  doubt  that  such  excellence  has  been 
a  great  asset.  Mr.  McElwain,  late  president  of  the  largest  shoe 
concern  in  the  country,  said  in  a  letter  (191 2) :  "  We  believe  that 
the  United  Shoe  Machinery  Co.  is  in  many  respects  rendering 
eflScient  service  to  shoe  manufacturers.  .  .  .  We  have  sufficient 
confidence  in  the  strength  of  this  company  to  believe  that  it  will 
stand  in  the  forefront  of  shoe  machinery  makers,  even  with  the 
removal  of  the  restrictions,  which  have  been  mentioned  [the  tying 
clauses]."  ^  Its  high  efficiency  was  commented  upon  freely  also 
by  the  Circuit  Court  before  which  the  dissolution  suit  was  tried.' 

Whether  the  existence  of  a  shoe  machinery  trust  promotes  in- 
vention, however,  is  a  disputed  question.  The  United  Company 
maintains  a  large  corps  of  inventors,  and,  according  to  counsel 
for  the  company,  has  made  distinct  progress  in  invention.  "  The 
United  Shoe  Machinery  Company  has  spent  all  the  way  from 
$250,000  to  $750,000  in  experiment  and  development  of  new 

*  Journal  of  Political  Economy,  21,  pp.  945-946. 

2  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  2268. 

•  222  Fed.  Rep.  372. 


machines  every  year  since  it  was  formed.  It  has  made  workable 
over  100  different  new  machines,  some  of  which  perform  opera- 
tions formerly  performed  by  hand  and  all  of  which  are  far  better 
than  those  formerly  in  use.  Taken  in  connection  with  reduction 
in  royalties,  shoe  manufacturers  by  their  use  effect  a  saving  of 
nearly  9  cents  in  the  cost  of  making  a  pair  of  Goodyear  welt 
shoes,  or  nearly  double  the  royalty  now  paid.  A  greater  number 
of  practical  patents  in  shoe  machinery  have  been  made  effective 
in  the  past  12  years  than  in  any  other  period  of  equal  length  since 
shoe-making  began."  ^ 

That  the  technical  progress  of  the  industry  has  been  promoted 
by  the  United  Company  is  denied  by  prominent  shoe  manufac- 
turers. A  group  of  them  instrumental  in  organizing  the  Shoe 
Manufactiu'ers'  Alliance  made  the  following  statement:  "At 
present  [191 2]  practically  all  of  the  essential  machinery  used  in 
bottoming  shoes  in  this  country  is  owned  by  a  single  corporation, 
which  is  dominated  practically  by  one  man.  This  is  a  condition 
permitting  the  exercise  of  complete  and  arbitrary  control  of  our 
businesses.  It  is  contrary  to  the  very  spirit  of  liberty,  and  as 
such  humiliating  to  us  as  shoe  manufacturers.  It  also  necessarily 
tends  to  retard  and  to  restrict  improvements  in  shoe  machinery. 

"  That  it  does  so  restrict  development  will  be  clear  to  those  who 
ccmipare  the  progress  of  shoe  machinery  diuing  the  last  12  years 
with  the  advances  made  from  year  to  year  prior  to  that  date. 
Shoe  manufacturing  in  America  is  to-day  efficient,  and  much  of 
that  efficiency  is  due  to  the  extraordinary  advances  in  shoe  ma- 
chinery made  prior  to  the  organization  of  the  Shoe  Machinery 
Trust.  Nearly  every  one  of  the  30  years  prior  to  1900  witnessed 
some  marked  advance  in  shoe  machinery.  That  was  a  period  of 
<^>en  competition  in  the  production  of  shoe  machinery.  Those 
who  controlled  the  successful  inventions  reaped  rich  rewards. 
The  activities  of  inventors  and  mechanics  were  stimulated,  and 
the  results  were  revolutionary  in  character.  Wages  increased, 
but  the  imit  labor  cost  of  producing  shoes  was  being  continually 
and  substantially  lowered. 

"Since  1900  the  development  in  essential  shoe  machinery  has 
*  Roe,  Journal  of  Political  Economy,  22,  p.  55. 


not  been  marked  by  any  important  invention  materially  reduc- 
ing the  cost  or  improving  the  quality  of  work.  Such  new  in- 
ventions as  have  been  made  are  confined  to  details  of  minor 
consequence  as  compared  with  the  advances  made  prior  to  the 
formation  of  the  Shoe  Machinery  Trust.  This  check  upon  the 
development  of  essential  shoe  machinery  is  believed  to  be  a  nec- 
essary result  of  the  formation  of  the  combination.  It  has  re- 
moved the  stimulus  of  competition."  ^ 

Mr.  Charles  H.  Jones  testified  that  it  was  the  belief  of  men  in 
the  shoe  business  and  in  the  shoe  machinery  business  that  the 
inventors  of  the  United  Company  were  allowed  to  work  only 
along  very  narrow  lines,  and  that  they  were  not  encouraged  to 
develop  original  ideas.^  In  fact,  so  he  said,  "  it  is  directly  against 
the  interests  of  this  company,  in  its  machinery  investments,  to 
find  revolutionary  machines.  They  have  got  90,000  machines, 
they  claim,  in  the  factories  of  the  United  States.  These  ma- 
chines are  producing  them  an  enormous  revenue.  What  possible 
inducement  would  it  be  for  them  to  throw  out  one,  two,  or  three 
of  those  machines  and  put  in  something  very  much  better? 
They  could  not  get  any  more  royalty.  They  would  have  a  very 
large  machinery  cost,  but  there  would  be  no  additional  return."  ' 

That  the  United  Shoe  Machinery  Company  possessed  no  mo- 
nopoly of  inventive  genius  is  proven  by  the  Plant  episode.^  Mr. 
Thomas  G.  Plant,  a  shoe  manufacturer  at  Roxbury,  Massachu- 
setts, succeeded  in  inventing  a  set  of  bottoming  machinery 
which,  to  say  the  least,  had  great  experimental  promise.  The 
business  of  the  shoe  machinery  trust,  protected  Us  it  was  by 
patents,  bade  fair  to  be  interfered  with,  when  the  whole  outfit, 
including  Mr.  Plant's  shoe  factory,  was  purchased  (1910)  by  the 
United  Shoe  Machinery  Company  for  $6,000,000.^ 

'  Report  of  the  Senate  Committee  on  Control  of  Corporations,  pp.  3266- 

*  Ibid.,  p.  2264. 

*  Ibid.,  p.  21 17. 

*  This  episode  is  described  in  Brief  for  the  United  States  (no.  207),  pp.  105- 


*  $3,000,000  in  cash  and  the  balance  in  stock  of  the  United  Company  hav- 
ing a  par  value  of  $1 ,500,000,  but  a  market  value  of  $3,000,000.   247  U.  S.  49. 


We  will  let  Mr.  Brandeis  (now  Justice  of  the  Supreme  Court) 
tell  the  story: 

"  He  [Mr.  Plant]  was  a  very  successful  shoe  manufacturer — a 
remarkably  successful  man.  His  concern  was  earning  five  or  six 
himdred  thousand  dollars  a  year.  His  business  had  been  built 
up  through  his  own  efforts  and  with  his  brother's  aid.  With  a 
few  about  him  he  displayed  admirable  business  ability,  govern- 
ing a  business  extending  throughout  the  country.  He  undertook 
a  task  which  was  large,  namely,  of  creating  a  competing  shoe- 
machinery  system,  and  it  involved  the  expenditure  of  several 
million  dollars — ^between  three  and  four  million  dollars.  Now, 
with  Mr.  Plant's  shoe  business  and  with  these  machines  which  he 
had  developed  into  a  successful  system — declared  by  some  of 
the  best  manufacturers  of  the  country  to  be  superior  to  the 
United's — ^he  was  in  a  position  where  he  was  entitled  practically 
to  any  reasonable  credit  he  might  ask.  The  amount  that  he  re- 
quired to  carry  him  along  was  about  $2,000,000.  He  had  prop- 
erty that  was  worth  four  or  five  million  dollars.  His  shoe  busi- 
ness was  one  of  the  leading  shoe  businesses  in  the  country,  and 
yet  after  he  had  completed  his  machinery  system;  after  he  had 
demonstrated  the  success  of  it  and  gotten,  the  certificate  of  ap- 
proval from  some  of  the  best  manufacturers  of  the  country,  east 
and  west,  his  credit  was  cut  oflF  absolutely.  Men  who  were  dis- 
posed to  give  credit  after  a  few  days  withdrew." 

"That  was  not  accident.  It  was  not  the  result  of  internal  de- 
liberation upon  the  question.  It  was  undoubtedly  the  result  of 
that  influence  exercised  directly  and  indirectly  by  the  powerful 
organization  to  which  he  was  opposed.  As  a  matter  of  fact  this 
Aoe  machinery  corporation  is'a  financial  power  as  much  as  it  is 
an  industrial  power.  The  managers  of  the  shoe  machinery  cor- 
poration are  practically  the  controlling  influence  in  the  First  Na- 
tional Bank  of  Boston.  They  are  a  very  large  influence  in  our 
leading  trust  company,  and  have  important  influence  in  the  Han- 
over National  Bank  and  other  banks  of  New  York.  It  has  been 
the  steady  policy  of  the  United  Shoe  Machinery  Corporation  to 
keep  at  all  times  a  huge  cash  balance  which  was  deposited  in 
those  various  banks,  evidently  not  so  much  for  current  use  in  the 


business  as  for  the  financial  control  which  they  exercised  through 
being  large  depositors  in  important  banks  ....  I  have  very 
good  evidence — absolutely  reliable  in  my  judgment — that  one  of 
the  men  who  refused  Mr.  Plant  credit,  thought  that  his  credit 
was  perfectly  good  and  was  willing  to  give  him  the  credit,  but  was 
not  willing  to  oppose  the  important  financial  interests  that  in- 
.timated  to  him  that  they  did  not  want  him  to  have  credit.  .... 
You  know  how  he  happ)ened  to  sell  out  his  business  to  the  Shoe 
Machinery  Trust.  Mr.  Plant  was  driven  to  the  position  where 
the  next  day  he  had  to  meet  perhaps  half  a  million  dollars  of  obli- 
gations and  he  simply  could  not  get  any  money.  He  had  been 
driven  to  the  last  ditch.  He  had  been  trying  to  raise  some  money 
through  an  arrangement  with  western  manufacturers.  They 
were  in  Boston  for  that  purpose.  They  were  not  quite  ready  to 
agree  to  advance  the  large  sum  of  money  needed.  It  was  neces- 
sary to  have  about  a  million  dollars  to  meet  the  situation.  He  left 
these  western  manufacturers  at  about  8  o'clock.  Failure  to 
meet  his  obligations  stared  Mr.  Plant  in  the  face.  He  then  went 
to  the  office  of  the  counsel  of  the  Shoe  Machinery  Trust  to  see 
the  members  of  that  corporation,  and  between  8  that  evening  and 
5  o'clock  the  next  morning  the  transaction  was  completed  by 
which  this  wonderful  comp)etitive  machinery  system  was  turned 
over  to  the  shoe  machinery  corporation.  The  officers  and  counsel 
were  in  conference  all  night  to  complete  the  transaction  which 
involved  something  like  $5,000,000,  enough  to  enable  Mr.  Plant 
to  pay  his  debts  and  to  remain  a  rich  man."  ^ 

Thus,  said  Mr.  Brandeis,  even  in  the  ably  managed  United 
Shoe  Machinery  Company  the  inefficiency  which  is  bred  of  mo- 
nopoly manifested  itself.^ 

The  charge  of  banking  pressure  has  been  denied  by  representa- 
tives of  the  company.  The  president  in  a  letter  to  the  Senate 
Committee  before  which  Mr.  Brandeis  told  his  story  wrote  that 
"the  United  Shoe  Machinery  Co.,  or  anyone  connected  with  it, 
never  did  anything  to  injure  Mr.  Plant's  credit  at  the  bank  or  to 
in  any  way  affect  banks  in  regard  to  Mr.  Plant."  ^   Representa- 

*  Report  of  the  Senate  Committee  on  Control  of  Corporations^  pp.  1188- 
1190.  *Ibid.,  p.  1 161.  'Ibid., p.  i960. 


tives  of  the  company  further  charged  that  Mr.  Plant^s  inven- 
tions in  their  then  existing  form  could  not  have  been  utilized  to 
the  best  advantage  by  the  trade,  but  combined  with  the  inven- 
ti(His  owned  by  the  United  Company  and  incorporated  in  its 
machines  they  would  advance  the  art  of  shoe-making  mate- 
rially.^ In  fact — so  they  charged — Mr.  Plant  had  no  desire  to 
supply  the  shoe  manufacturers  with  machines;  he  had  built  up 
his  line  of  machines  to  sell  to  the  United  Company.*  Whatever 
may  be  the  merits  of  this  controversy,  it  is  admitted  by  coimsel 
for  the  company  that  the  improvements  made  by  Mr.  Plant 
were  worth  every  cent  that  they  cost  the  company;  '  and  it 
would  appear  to  be  proven,  therefore,  that  the  United  Company, 
with  all  its  corps  of  inventors,  did  not  entirely  take  the  place  of 
independent  endeavor  in  promoting  the  technical  progress  of 
the  industry. 

TTie  profits  of  the  United  Shoe  Machinery  Company  come 
laigely,  of  course,  from  the  royalties  on  the  use  of  the  leased  ma- 
chines. The  niunber  of  machines  on  lease  in  the  United  States 
on  March  1,1911,  was  90,276.^  According  to  the  president  of  the 
OHnpany,  the  amounts  paid  per  pair  of  shoes  for  the  use  of  all 
the  principal  royalty  machines  f umished  by  the  company  for  the 
manufacture  of  the  different  classes  of  shoes,  when  accounts 
were  paid  within  thirty  days,  were  substantially  as  follows:  ^ 

Goodyear  welts,  men's  work $0.05694 

Goodyear  welts,  women's  work 04694 

Goodyear  turn  shoes,  women's  and  misses' 01972 

Goodyear  turn  shoes,  chiklren's 00500 

McKay  shoes,  men's  and  women's 01746 

McKay  sewed  shoes,  children's 01391 

'  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  1959. 
See  on  this  point  247  U.  S  50-51,  87-89. 

'Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  2162. 
Judge  Dodge  of  the  Circuit  Court  declared  this  charge  to  be  true.  222 
Fed,  Rep.  376. 

'Report  of  the  Senate  Committee  on  Control  of  Corporations, 
p.  2162. 

^Arwual    Report   of    the    United    Shoe    Machinery    Company,    191 1, 

p.  5. 

*  Ibid.,  p.  7. 


From  these  royalties  there  should  be  deducted  six-tenths  of 
a  cent  per  pair  for  men's  Goodyear  welts,  forty-five  one- 
hundredths  of  a  cent  per  pair  for  women's  Goodyear  welts,  and 
seventy-five  one-hundredths  of  a  cent  per  pair  for  women's  and 
children's  Goodyear  turns;  the  foregoing  sums  to  be  invested  in 
stock  of  the  company,  and  given  to  lessees.^  This  profit-sharing 
plan,  presumably  designed  to  secure  the  adhesion  of  the  shoe 
manufacturers,  was  subsequently  abandoned  (191 2)  because — 
so  it  was  alleged — of  the  government  dissolution  suit  filed  in 
December,  191 1. 

The  foregoing  royalties,  according  to  the  president,  covered 
substantially  everything  that  the  company  received  for  the  use 
of  its  principal  machines  from  those  manufacturers  who  used  its 
machines  in  making  Goodyear  welt,  Goodyear  turn  or  McKay 
sewed  shoes.^  In  return  for  the  royalties  and  rentals  which  it 
received,  the  company  assumed  the  cost  of  invention,  develop- 
ment, manufacture,  and  depreciation  of  machines;  the  care  of 
the  machines  through  its  force  of  over  500  experts,  who  devoted 
their  entire  time  to  the  service;  the  purchase  of  patents;  and  the 
cost  of  administration.  According  to  the  president,  the  only 
important  item  of  cost  in  the  manufacture  of  shoes  which  did  not 
increase  during  the  first  twelve  years  after  the  company  was 
formed  was  the  item  of  machinery. 

The  profits  of  the  company  have  been  very  liberal.  Up  to 
1905,  6  per  cent  dividends  were  regularly  paid  on  the  preferred 
stock  and  8  per  cent  on  the  pommon  stock.  In  that  year  a  re- 
organization was  eflFected.  For  reasons  not  clear,  a  new  com- 
pany— the  United  Shoe  Machinery  Corporation — ^was  organized 
in  May.  to  serve  as  a  holding  company.  The  Corporation  offered 
to  exchange  its  preferred  stock  at  par  plus  i  1/2  per  cent  cash 
for  the  preferred  stock  of  the  United  Shoe  Machinery  Company, 
and  150  per  cent  of  its  common  stock  plus  3  per  cent  cash  for 
the  common  stock  of  the  Company.    This  offer  was  generally 

*  Annual  Report  of  the  United  Shoe  Machinery  Company,  iqh,  p.  7. 

*  A  number  of  auxiliary  machines  could  be  used  by  the  shoe  manufacturer 
without  payment  of  royalty,  but  upon  payment  of  a  nominal  annual  rental 
to  cover  the  depredation  of  the  machines. 


accepted,  and  the  Corporation  by  1915  held  98  1/2  per  cent  of 
all  the  stock  of  the  Company}  Upon  the  preferred  stock  of  the 
Corporation  6  per  cent  has  regularly  been  paid,  and  upon  the 
common  stock,  including  the  50  per  cent  addition,  8  per  cent 
as  before.  In  addition,  the  common  stockholders  have  received 
numerous  stock  and  extra  caA  dividends.  In  1907  they  re- 
ceived a  25  per  cent  stock  dividend;  in  1909  a  10  per  cent  stock 
dividend,  and  2  per  cent  extra  in  cash;  and  in  1910  a  10  per  cent 
stock  dividend,  and  4  per  cent  extra  in  cash.  The  total  in  1910 
was  thus  12  per  cent  in  cash  plus  10  per  cent  in  stock.  On  the 
origmal  common  stock,  which  may  have  been  heavily  watered, 
this  amoimted  to  quite  a  high  figure.  To  be  exact,  it  amounted 
to  I18.15  cash  on  every  $100  of  common  stock  issued  by  the 
United  Shoe  Machinery  in  1899,  and  counting  the  extra  dividend 
in  1910  to  $22.15  in  cash.  These  are  dividends  only;  the  profits 
were  mudi  greater,  as  is  evident  from  the  large  surplus  built  up. 
For  example,  during  the  three  years  ending  March  i,  1912,  the 
net  earnings  aggregated  $17,268,000;  the  dividends  $9,344,000; 
and  the  surplus  $7,924,000. 

'  Moody's  Manual,  Industrial  and  Public  Utility  Section,  1916,  p.  3690. 



With  the  early  history  of  the  iron  and  steel  industry  we 
are  not  concerned.  Even  as  late  as  1890  there  were  practi- 
cally no  combinations  of  the  modem  type  in  the  steel  industry. 
To  be  sure,  the  Illinois  Steel  rnmnftny  ir^i  fiMfflPki  b^d  been 
organized  in  1889  as  a  consolidation  of  three  erstwhile  com- 
,petitive  concerns,  yef'slich  cofnBmations  were  unusual.  Jur- 
ing  the  early  nineties,  howeverTthe  situation  changed.  The 
individuarjplants  not  only  continued  to  expand  in  size,  as  during 
the  eighties,  but  they  became  united  in  combinations.  In  1891 
the  Lackawanna  Iron  and  Steel  Company  was  incorporated, 
a  consolidation  of  the  Lackawanna  Iron  and  Coal  Company  and 
the  Scranton  Steel  Company.  In  1892  the  Colorado  Fuel  and 
Iron  Company  was  organized  to  unite  the  Colorado  Fuel  Com- 

*  On  the  United  States  Steel  Corporation  see:  Report  of  the  Commissioner 
of  Corporations  on  the  Steel  Industry,  part  I,  Organization,  Investment, 
Profits,  and  Position  of  United  States  Steel  Corporation  Quly  i,  191 1), 
part  II,  Cost  of  Production,  Preliminary  Report  (January  22,  191 2),  and 
part  III,  Cost  of  Production,  Full  Report  (May  6, 1913);  Brief  for  the  United 
States,  in  two  parts,  in  United  States  v.  United  States  Steel  Corporation 
(no.  6214);  Brief  for  the  United  States,  in  two  volumes,  in  United  States  v. 
United  States  Steel  Corporation  (no.  481);  Brief  for  the  United  States  Sted 
Corporation  (no.  481);  223  Fed.  Rep.  55-179;  251  U.  S.  417-466;  House 
Report  no.  11 27, 62nd  Cong.,  2nd  sess.  (Stanley  Committee  Report);  Report 
of  the  Senate  Committee  on  Interstate  Conmierce  on  the  Control  of  Corpora- 
tions, 19 13;  Industrial  Commission,  vol.  I,  pp.849-1039,  and  vol.  XIII,  pp. 
448-516;  Berglund,  The  United  States  Steel  Corporation;  Wilgus,  A  Study 
of  the  United  States  Steel  Corporation  in  its  Industrial  and  Legal  Aspects; 
Willoughby,  Quarterly  Journal  of  Economics,  16,  pp.  94-115;  Meade,  Trust 
Finance,  ch.  11;  McVey,  Yale  Review,  7,  pp.  302-318,  and  8,  pp.  156-172; 
Walker,  Quarterly  Journal  of  Economics,  20,  pp.  353-398;  Taussig,  Some 
Aspects  of  the  Tariff  Question,  chs.  9-10,  12-13;  Dunbar,  The  Tin-Platc 



pany  and  the  Colorado  Coal  and  Iron  Company.*    In  the  same  l/£"^^ 
year  the  Carnegie  StefiLCompany  (Ltd.),  a  partnership,  wasf 
formed  with  a  capital  stock  of  $25,000,000.    This  concern,  with  / 
all  its  plants  concentrated  at  Pittsburg,  was  then  the  largest  in\ 
the  industry.    Yet  it  could  hardly  be  considered  a  real  combina-  \ 
tion,  since  it  represented  for  the  most  part  simply  a  more  binding  j 
union  of  interests  long  affiliated.    Other  important  concerns  in 
the  iron  and  steel  industry  in  the  early  nineties  were  Jones  and 
Laughlin;  the  Pennsylvania  Steel  Company,  with  its  subsidiary, 
the  Maryland  Steel  Company;  the  Tennessee  Coal,  Iron  and 
Railroad  Company;   the  Cambria  Iron  Company;  and   the 
Bethlehem  Iron  Company. 

Most  of  the^above  enumerated  concerns  were  engaged  chiefly 
in  the^jmyluctiop  of  JM^mi-fi niched  steel  (billets,  blooms  and 
slabs),  and  of  the  simpler  and  heavier  forms  of  rolled  steel  prod- 
ucts^  such  as  rails,  plates,  and  beams.  The  mitni^faf  tnrt^  nf  the 
hn-fcicr  Tifrrl  prodnrtfi  ym(\  r^^^fntratpd  j^  a  considerable  ex- 
tent,  even  in  the  earlv  nineties,  in  the  hands  of  a  comparatively 
few  producers.  Thus  the  Carnegie  Steel  .Copipany,  the  Illinois- 
St€^rCOTipany,  the  Jones  and  LaughlinJnterests,  the  Lacka- 
wannaTron  and  Steel  Company,  the  Pennsylvania  Steel  Com- 
pany, the  Cambria  Iron  Company,  and  the  Bethlehem  Iron 
Company  together  turned  out  nearly  half  of  the  steel  ingots 
produced  in  this  country  (steel  ingots  are  the  raw  material  from 
which  nearly  all  steel  products  are  made,  but  they  are  generally 
put  through  a  further  process  of  manufacture  before  being  sold). 
But  these  comjmnies  were  entirely  separate  with  respect  to 
ownership,  a](^<j  ^n  spife  rf Jjif  PYigrpnre  qf  pools  of  one  kind  or 
anrtther^were^Qiiifp  active  Competitors.^ 

Save  these  companies  producing  the  heavier  steel  products, 
there  were  comparatively  few  concerns  of  any  considerable  size 
in  the  iron  and  steel  industry  in  the  early  nineties,  and  very  few 

*Tbc  Colorado  Fuel  and  Iron  Company  at  this  time,  however,  had  a 
greater  interest  in  the  coal  trade  than  in  the  iron  and  steel  business. 

'Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
part  I,  p.  65.  Referred  to  hereafter  as  Report  of  the  Commissioner  of  Cor- 


combinations.  The  Consolidated  Steel  and  Wire  Company,  to 
be  sure,  was  an  important  combination  in  the  wire  and  nail 
business  (1892),  yet  for  the  most  part  the  manufacture  of  such 
products  as  nails,  tin  plate,  and  sheets  was  carried  on  by  numer- 
ous concerns,  many  of  them  producing  on  a  small  scale.  Com- 
petition in  these  lines  was  quite  vigorous,  except  when  restrained 
on  occasion  by  pooling  agreements. 

The  situation  was  the  same  in  the  iron  mining  industry. 
While  there  were  a  few  large  concerns,  such  as  the  Minnesota 
Iron  Company  and  the  Lake  Superior  Consolidated  Iron  Mines, 
organized  in  1882  and  1893,  respectively,  yet  injjeneral  the 
ownership  of  the  iron  ore  mines  was  widely  scattered;  and 
thougTTthere  were  iron  ore  p^ls.  competition  ^as  the  character-^ 
istic  feature  of  ^hf  ]>^"g»»-n'^ 

In  another  respect  the  steel  industry  of  the  early  nineties 
presented  a  marked  contrast  with  the  inHii<;trv  gf  to-cJay.  "This 
was  in  the  comparative  absence  of  inteyratinn. — the  practice  of 
uniting  under  one  control  the  successive  stages  in  the  manufac- 
ture of  the  finished  products.  There  was  some  integration,  to  be 
sure.  The  Carnegie  Steel  Company,  for  example,  through  the 
Frick  Ccike  Company  hfid  ^^^^  Hppngifg  of  coking  coal,  and  by 
the  purchase  in  1892  of  a  half-interest  in  the  Oliver  Irop  Mining 
Company  had  provided  itself  with  a  supply  of  iron  ore.  But  the 
production  of  the  Oliver  concern  was  quite  inadequate  to  the 
needs  of  the  Carnegie  Company,  and,  moreover,  Mr.  Carnegie 
was  understood  to  be  opposed  to  the  ownership  of  ore  mines.* 
The  business  of  mining  iron  ore,  like  the  production  of  crude 
oil,  was  largely  speculative;  and  Mr.  Carnegie,  like  Mr.  Rocke- 
feller, was  willing  that  the  risks  be  borne  by  those  more  specu- 
latively inclined.  Other  companies  had  integrated  their  business 
slightly,  yet  generally  speaking  it  was  true  that  the  manufac- 
turers of  finished  products  bought  the  semi-finished  steel  which 
constituted  their  raw  material;  the  manufacturers  of  steel  in 
turn  bought  their  pig  iron;  and  comparatively  few  iron  and  steel 
manufacturers  possessed  large  iron  ore  deposits  or  iron  ore 
railroads.  The  ^parate  stages  in  the  process  of  production 
*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  68. 



were  not  at  that  time  united  under  one  management  as  at 

rom  what  has  been  said  it  is  apparent  that  thej^^ling 
characteristic  of  the  iron  and  steel  industry  during  the  early  and. 
middle  nineties  was  its  competitive  character.    It  is  true  that 

agreements  were  quite  common;  indeed,  there  was  hardly  any 
branch  of  the  iron  and  steel  industry  that  was  free  from  them.  Yet 
the  pools  generally  maintained  but  a  precarious  existence,  and  this 
was  e^)ecially  true  of  the  less  formal  "gentlemen's  agreements." 
In  the  latter  part  of  the  nineties,  however,  the  situation 
underwent  a  marked  change.  In  1898  the  combination  move- 
ment struck  the  iron  and  steel  industry,  and  by  1900  a  large 
number  of  combinations  had  been  formed.  Some  idea  as  to 
the  extent  of  this  movement  is  given  by  the  following  table, 
which  sjiows  the  leading  iron  and  steel  combinations  created 
during  1898  to  1900,  with  their  authorized  capitalization.^ 

Leiading  Combinations  in  the  Iron  and  Steel  Industry,  1898-1900 
A.  Combinations  later  united  in  the  United  States  Steel  Corporation 

Name  and  year  of  organizalion 

American  Steel  and  Wire  Co.  of  Illinois  * . . . 

Federal  Steel  Co 

American  Tin  Plate  Co 

American  Steel  and  Wire  Co.  of  New  Jersey 

American  Steel  Hoop  Co 

National  Steel  Co 

National  Tube  Co 


American  Bridge  Co 

American  Sheet  Steel  Co 

Carnegie  Co.  of  New  Jersey 

Shelby  Steel  Tube  Co 



%     24,000,000 









*  Report  of  the  Commissioner  of  Corporations,  part  I,  pp.  80-81. 
*Thi5  company  was  merged  in  1899  "*to  the  American  Steel  and  Wire 
Co.  of  New  Jersey. 


B.  Combinations  not  subsequently  united  in  the  United  States  Steel 


Name  and  year  of  organization 


American  Car  and  Foundry  Co 

S     60.000.000 

American  Iron  and  Steel  Manufacturing  Co 


Empire  Steel  and  Iron  Co 

National  Enameling  and  Stamping  Co 


Pressed  Steel  Car  Co 

Republic  Iron  and  Steel  Co 

Sloss-Sheffield  Steel  and  Iron  Co 

United  States  Cast-Iron  Pipe  and  Foundry  Co 

Virginia  Iron,  Coal  and  Coke  Co 

Crucible  Steel  Co.  of  America 





i  I 

In  addition  to  these  combinations  there  were  a  number  of 
others  in  the  machinery  trade  or  similar  branches  of  the  industry. 
Among  them  were  the  American  Bicycle  Company,  capitalized 
at  $30,000,000;  the  International  Steam  Pump  Company 
($27,500,000);  the  United  Shoe  Machinery  Company  ($25,- 
000,000);  the  Otis  Elevator  Company  ($11,000,000);  and  the 
American  Radiator  Company  ($10,000,000). 

The  first  table  shows  the  companies  which  subsequently 
united  to  form  the  United  Stat^  Steel  Corporation.  A  brief 
description  of  these  companies  will  facilitate  an  understanding 
of  the  subsequent  course  of  events. 

Carnegie  Company  of  New  Jersey.  The  leading  concern 
in  the  iron  and  steel  industry,  without  a  doubt,  was  the  Cam^e 
Company  of  New  Jersey.  This  company  was  organized  in 
March,  1900,  being  simply  a  reorganization  of  the  Carnegie 
interests  and  of  the  H.  C.  Frick  Coke  Company  (owning  exten- 
sive coking  coal  properties  in  the  Connellsville  district  of  Penn- 
sylvania). It  had  an  authorized  capitalization  of  $320,000,000, 
half  stock  and  half  bonds. ^    All  of  its  manufacturing  properties 

*  Not  counting  $25,081,813  of  underlying  indebtedness  represented  by 


were  concentrated  in  the  vicinity  of  Pittsburg,  thus  giving 
compactness  to  its  organization.  The  Carnegie  Company  also 
derived  strength  from  the  fact  that  its  size  had  been  attained 
largely  through  intgrnal  ex^nsion,  rather  than  through  the 
acquisition  of  competitors,  the^purchase  of  the  Duquesne  works 
(1890)  being  the  most  important  exception.  The  company 
was  noted  for  its  efficiency,  its  financial  power,  and  its  conserva- 
tive management.  It  had  built  up  its  property  chiefljTout 
of  earnings;  its  securities  were  not  on  the  stock  market;  and  its 
owners  were  actively  engaged  in  the  business.  Among  its  more 
important  subsidiary  and  allied  concerns  were  the  QUyer  Iron 
Mining  Company,  the  ore  deposits  of  which,  together  with  those 
secured  by  the  lease  of  the  properties  of  the  Lake  Superior 
Consolidated  Iron  Mines,  assured  the  Carnegie  Company  an 
ample  supply  of  good  ore  for  a  long  time;  the  Pittsburg,  Bessemer 
and  Lake  Erie  Railroad,  running  from  the  Great  Lakes  to  Pitts- 
burg, and  used  mainly  for  the  transportation  of  iron  ore;  the 
Union  Railroad  Company^  operating  an  important  belt  line  in 
the  Pittsburg  district;  and  various  gas,  water,  and  dock  com- 

The  ijijpf  Miffini^?  of  the  Carnegie  Company  was  ^the_manu- 
facture  ofsgni-finished  steel  for  tjie^lrade,  and  of  heavy  steel 
products,  such  as  raols,  plates,  structural  steel,  bars,  skelp,  and 
bridge  material.  Its  leading  position  is  indicated  in  the  fact  that 
in  1900  it  produced  some  18  per  cent  of  all  the  ingots  produced  in 
the  coimtry,  its  nearest  competitor  producing  only  about  15  per 
cent^  The  Carnegie  Company  did  not  make  such  finished 
products  as  wire,  nails,  tubes,  tin  plate,  and  sheet  steel;  it  merely 
supplied  the  manufacturers  of  these  finished  products  with 
the  necessary  crude  steel.  But  it  was,  nevertheless,  in  a  position 
to  turn  out  these  finished  products  itself  on  comparatively  short 
notice,  should  its  customers  decide  to  produce  their  own  crude 
steel, — a  circumstance  that  later  proved  to  be  one  of  the  imset- 
tling  factors  leading  to  the  formation  of  the  United  States 
Steel  Corporation. 

The  Federal  Steel  Company.     The  largest  competitor  of 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  87. 


the  Carnegie  Company  was  the  Federal  Steel  Company,  or- 
ganized in  September,  1898.  The  Federal  Steel  Company  was  a 
consolidation  of  the  Illinois  Steel  Company,  with  several  steel 
plants  in  or  near  Chicago,  and  one  at  Milwaukee;  the  Lorain 
Steel  Company,  with  a  plant  at  Lorain,  Ohio;  the  Johnson 
Company,  with  a  plant  at  Johnstown,  Pennsylvania;  and  the 
Minnesota  Iron  Company,  which  not  only  owned  large  iron  ore 
deposits,  but  also  an  iron  ore  railroad  from  the  mines  to  the  Lakes 
(the  Duluth  and  Iron  Range  Railroad),  and  a  fleet  of  lake 
vessels  by  which  the  ore  was  carried  from  the  railroad  terminus  to 
the  lower  lake  ports.  The  Illinois  Steel  Company  controlled  the 
Chicago,  Lake  Shore  and  Eastern  Railway,  connecting  its  vari- 
ous plants  in  the  vicinity  of  Chicago;  and  the  Federal  Steel 
Company  itself  acquired  the  stock  of  the  Elgin,  Joliet  and 
Eastern  Railway,  a  line  connecting  with  nearly  every  railroad 
entering  Chicago.  The  Federal  Steel  Company  was  thus  well 
integrated;  in  fact,  the  chief  purpose  in  its  formation  seems  to 
have  been  not  so  much  the  suppression  of  competition  as  the 
creation  of  an  organization  that  would  be  independently 
situated,  not  only  with  respect  to  its  manufacturing  plants,  but 
also  with  respect  to  its  ore,  fuel,  and  means  of  transportation. 

The  Federal  Steel  Company,  like  the  Carnegie  Company, 
produced  chiefly  billets,  steel  rails,  plates,  structural  shapes, 
wire  rods,  and  semi-finished  steel  for  the  trade,  many  of  its 
largest  customers  being  themselves  steel  manufacturers.  At 
the  time  of  its  organization  in  1898  it  produced  about  15  per  cent 
of  the  country*s  output  of  ingots,  somewhat  less  therefore  than 
the  output  of  the  Carnegie  Company.*  The  Federal  Steel  Com- 
pany was  generally  rated  as  a  Morgan  property. 

The  Na,tional  Steel  Company.  Next  in  importance  after  the 
Carnegie  Company  and  the  Federal  Steel  Company  was  the 
National  Steel  Company,  organized  in  February,  1899.  The 
National  Steel  Company  was  a  consolidation  of  a  nimiber  of 
steel  concerns,  located  mainly  in  Ohio,  and  producing  in  1899 
about  12  per  cent  of  the  total  output  of  steel  ingots.*    It  pro- 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  88. 

*  Ibid.,  p.  89. 


duced  chiefly  semi-finished  steel,  i.  e.,  billets,  sheet  bars,  and 
tin  plate  bars,  rather  than  the  finished  products.  It  had  an 
excellent  market  for  its  crude  steel  through  its  close  affiliation 
with  the  American  Tin  Plate  Company,  the  American  Steel 
Hoop  Company,  and  the  American  Sheet  Steel  Company,  all 
promoted  by  Judge  W.  H.  Moore  (the  organizer  of  the  National 
Steel  Company),  and  all  obtaining  their  raw  material  largely 
from  it.  The  National  Steel  Company  carried  integration  almost 
as  far  as  the  Carnegie  Company  and  the  Federal  Steel  Company, 
but  differed  from  them  in  being  also  a  combination  of  formerly 
competitive  concerns.  ^ 

The  Aniedcan_-IiiL-Plate^  Company — the  tin  plate  trust. 
This  company,  organized  in  December,  1898,  illustrates  a  group 
of  combinations  formed,  not  to  integrate  more  fully  the  business 
of  production  (and  thus  to  achieve  a  more  strategic  position), 

but   to  rpf^traiii   ftf  pyHuHp  mmpptitinp       It  brought   together 

39  plants,  controlling  279  mills,  which  represented  nearly  every 
concern  in  the  country  making  tin  plate.^  It  effected,  therefore, 
a  tin  plate  trust.  Having  done  so,  it  attempted  to  strengthen  its 
position  by  entering  into  exclusive  contracts  with  the  principal 
manufacturers  of  rolls  and  machinery  used  in  the  manufacture 
of  tin  plate,  and  thus  to  oppose  an  effective  obstacle  to  the 
construction  of  competing  mills.^  While  this  scheme  was  not 
altogether  successful  (the  contracts  were  cancelled  in  1902  at  the 
insistence  of  the  Steel  Corporation),  the  company  did  succeed  in 
maintaining  for  several  years  a  monopolistic  position  in  its 
branch  of  the  steel  industry. 

The  American  Steel  and^ireXyjlPp^Tiy  pf  N^iy  Jf>rRpy — the 
wire  trust.  This  company  represented  another  attempt  to 
restrain  competition  and  to  make  large  promoters'  profits.  The 
dissolution  of  the  wire  nail  pool  toward  the  close  of  1896  had 
been  followed  by  marked  reductions  in  prices,  and  this  led  to  the 

»  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  170.  The  United  States 
Steel  Corporation  admitted  that  the  American  Tin  Plate  Company  acquired 
control  of  concerns  producing  90  per  cent  of  the  country's  output  of  tin  plate. 
Brief  for  the  Steel  Corporation  (no.  481),  p.  77. 

'  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  192. 


organization  in  March,  1898,  of  a  combination, — ^the  American 
Steel  and  Wire  Company  of  Illinois.  The  next  year  (January) 
the  combination  united  with  most  of  the  remaining  wire  con- 
cerns to  form  the  American  Steel  and  Wire  Company  of  New 
Jersey.*  This  company  produced  mainly  wire  nails,  plain  wire, 
barbed  wire,  and  wire  fencing;  and  according  to  the  brief  for 
the  government  in  its  suit  against  the  United  States  Steel  Cor- 
poration it  secured  an  almost  complete  monopoly  of  barbed  wire 
and  woven  wire,  and  controlled  about  four-fifths  of  the  nails  and 
the  wire  fencing  produced  m  the  United  States.^  The  American 
Steel  and  Wire  Company  was  well  integrated,  possessing,  either 
at  its  organization  or  shortly  thereafter,  large  ore  deposits,  a 
big  reserve  of  coking  coal,  a  large  fleet  of  Lake  vessels,  and 
facilities  for  producing  a  limited  amount  of  pig  iron  and  crude 

The  National  Tube  Company — the  tube  trust.  The  National 
Tube  Company  was  incorporated  in  June,  1899,  to  monopolize 
the  tubing  industry,  and  incidentally  to  enable  its  promoters  to 
make  a  profit  through  its  organization  (one-quarter  of  its  $80,- 
000,000  stock  issue  was  given  to  the  promoters).  Its  principal 
product  was  iron  and  steel  wrought  tubing,  and  the  company 
stated  in  1900  that  its  yearly  capacity  was  1,000,000  tons,  or 
90  per  cent  of  the  total  capacity  of  the  coimtry.^  While  this  may 
have  been  an  exaggeration  of  the  extent  of  its  control,  neverthe- 
less the  company  did  produce  nearly  three-fourths  of  the  co\m- 
try^s  output  of  wrought  tubing.^  The  National  Tube  Company, 
though  rated  as  a  Morgan  concern,  was  largely  dependent,  be- 
cause of  the  location  of  its  plants,  on  the  Carnegie  Company  for 
the  semi-finished  steel  that  constituted  its  raw  material.  Subse- 
quently it  proposed  to  produce  itself  most  of  its  raw  material, 
with  consequences  soon  to  be  described. 

The  American  Steel  Hoop  Company.     This  company  was 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  q2. 

*  Brief  for  the  United  States  (no.  6214),  part  I,  p.  50. 

*  Ibid.,  (no.  481),  vol.  II,  p.  222. 

*  See  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  92;  Brief 
for  the  United  States  (no.  6214),  part  I,  p.  53;  and  223  Fed.  Rep.  167. 



formed  in  April,  1899.  It  united  nine  concerns  producing 
mainly  iron  and  steel  bars,  hoops  and  bands,  cotton  ties,  and 
iron  skelp.  It  was  primarily  a  combination  of  erstwhile  competi- 
tive concerns,  and,  according  to  the  Commissioner  of  Corpora- 
tions, a  desire  to  limit  competition  and  afford  a  large  profit  to  the 
promoters  was  imdoubtedly  the  ruling  motive  in  its  organization.^ 
The  promoters  received  for  their  services  $5,000,000  of  the 
$33,000,000  stock  issued  by  the  company,  or  over  15  per  cent  of 
its  total  capitalization.^ 

The  American  Sheet  Stft^l  Cfrmpnny — the  sheet  steel  trust. 
This  company  was  organized  in  March,  1900,  to  consolidate  the 
properties  of  the  principal  manufacturers  of  sheet  steel.  Like 
the  American  Tin  Plate  Company  it  was  formed  to  unite  com- 
peting concerns;  and  it  secured  control  upon  its  organization  of 
about  70  per  cent  of  the  coimtry's  capacity  of  sheet  steel,  the 
only  important  product  made  by  it.* 

TheJ^meriran  Bridge  Qmipany.  This  company,  like  most  of 
those  already  described,  was  organized  (April,  1900),  not  to 
secure  the  advantages  of  integration,  but  the  profits  arising  from 
a  curbing  of  competition.*  Its  main  business  was  the  erection  of 
bridges  and  of  steel  construction  for  buildings,  and  it  was  entirely 
dependent  on  the  large  steel  manufacturers  for  its  raw  material. 
The  American  Bridge  Company,  like  the  Federal  Steel  Company 
and  the  National  Tube  Company,  had  close  aflUiations  with  the 
firm  of  J.  P.  Morgan  and  Company. 

The  Shelby  Steel  Tube  Company — the  seamless  tube  trust. 
This  company,  incorporated  in  February,  1900,  combined  practi- 
cally all  the  concerns  in  the  coimtry  manufacturing  seamless 
tubing.*  It  claimed  90  per  cent  of  the  country's  output,  and 
there  is  no  doubt  that  it  did  have  a  substantial  monopoly  of  its 
special  product  until  its  field  was  invaded  by  the  National  Tube 
Company.    The  motive  in  its  organization  was  the  establish- 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  91. 
«  CL  p.  287. 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  91. 

*  Ibid., p.  93. 


ment  of  a  trust;  the  element  of  int^ration  was  distinctly 

The  Lake  Superior  Consolidated  Iron  Mines.  The  combina- 
tions and  trusts  just  described  were  all  organized  between  1898 
and  1900,  and  each  of  them  became  a  part  of  the  United  States 
Steel  Corporation.  One  other  concern,  organized  somewhat 
earlier,  deserves  mention.  The  Lake  Superior  Consolidated 
Iron  Mines,  largely  owned  by  Standard  Oil  interests,  was  or- 
ganized in  1893.  It  manufactured  no  iron  or  steel;  it  was  simply 
an  ore  producer  and  a  transportation  company.  It  had  vast 
reserves  of  iron  ore,  and  it  owned  an  important  iron  ore  rail- 
road,— the  Duluth,  Missabe  and  Northern.  Affiliated  with  it 
was  the  Bessemer  Steamship  Company,  the  largest  owner  of  ore 
vessels  on  the  Great  Lakes.  The  Lake  Superior  Consolidated 
Iron  Mines,  both  because  of  its  property  and  its  financial  back- 
ers, was  a  very  important  concern,,  and  its  acquisition  by  the 
United  States  Steel  Corporation  in  1901  greatly  strengthened 
the  latter's  position.  • 

What  is  the  explanation  of  this  remarkable  movement  to- 
ward combination  in  the  iron  and  steel  industry?  The  advan- 
tages which  these  combinations  might  have  expected  to  gain 
were  three-fold:  (i)  the  restdctioa.  ii£_  compititinn;  (2)  a 
greater  degree  of  integration;  (3)  stodcjnarket  profits  for  the 

The  large  profits  that  the  manufacturers  hoped  to  gain  were 
realized.  Aided  by  the  favorable  industrial  situation,  these 
combinations  and  trusts  were  able  to  put  prices  up  to  very  hi^ 
figures.  The  price  of  Bessemer  pig  iron,  which  had  averaged 
$10.32  per  gross  ton  in  1898,  went  up  to  $18.88  per  ton  in  1899, 
and  to  $24.72  in  March,  1900.  The  price  of  steel  billets  had  been 
$15.18  per  gross  ton  in  1898;  it  rose  to  $29.81  per  ton  in  1899,  and 
to  $33.00  in  March,  1900.  The  price  of  steel  rails  averaged 
$17.63  per  gross  ton  in  1898,  $28.13  i^  1S99,  and  $35.00  in  March, 
1900.  The  price  of  tin  plate  averaged  $64.08  per  gross  ton  in 
1898;  the  next  year  it  went  to  $95.48.  Prior  to  the  formation 
of  the  tube  trust  the  price  of  tubes  had  been  $30.00  per  ton. 
During  1899  (the  year  of  its  formation)  the  price  rose  to  $67  per 



gross  ton,  and  early  in  igcx)  reached  its  maximum  at  $89.^ 
Further  details  may  be  had  by  consulting  the  table.^  It  is  not 
meant  to  imply,  of  course,  that  all  of  these  price  advances 
were  the  result  of  the  formation  of  combinations  and  trusts; 
but  it  is  safe  to  say  that  they  took  full  advantage  of  the  favor- 
able industrial  situation.^ 

The  desire  to  ^-^^^nct  ftr  ^^^'^inatff  rO"^petition  was,  according 
to  the  Commissioner  of  Corporations,  undoubtedly  the  main 
reason  for  the  formation  of  these  combinations.  Taken  as  a 
whole,  the  iron  and  steel  manufacturers  had  been  very  prosper- 
ous, but  the  severe  industrial  depression  which  began  in  1893 
and  lasted  imtil  1897  had  cut  into  their  profits  heavily.*  The 
manufacturers  were  anxious  to  restore  the  palmy  days,  and 
therefore  turned  to  combination  and  monopoly  as  likely  to  prove 

•  223  Fed.  Rep.  168. 

"Average  Prices  of  Certain  Iron  and  Steel  Products  in  i8q8, 
1899,  and  March  and  October,  1900  * 


Pig  iron  t 


Rails  t 

Plates  t 

Structural  shapes  (beams)  t 

Tin  plates  § 



Sheets  (black)  t 

Per  gross  ton 







15  18 
17  63 


33  00 
35  00 


49  36 













24  19 
33  60 


*  Brief  for  the  United  States  (no.  481),  vol.  I,  pp.  39,  48. 

t  F.  o.  b.  Pittsburg. 

}  F.  o.  b.  Pennsylvania  manufacturing  plants. 

f  F.  o.  b.  New  York. 

'  For  a  further  discussion^  see  p.  263. 

*The  competition  between  the  steel  manufacturers  was  not  "ruinous." 
Sec  Jones,  Quarterly  Journal  of  Economics,  34,  pp.  497-502. 


more  eflFective  than  pools,  which  were  not  only  industrially 
unstable,  but  illegal  as  well. 

A  second  advantage  in  conibinatign  lay  in_thej»ossibilities 
of  integration.  A  company  which  combined  under  one  manage- 
ment the  successive  stages  in  the  productive  process  was  able  to 
eflFect  certain  economies  that  were  not  open  to  a  nonint^rated 
concern.  These  economies  included  a  saving  in  fuel  costs  (those 
connected  with  the  reheating  of  the  metal),  a  saving  in  the  labor 
and  time  involved  in  moving  the  materials,  and  the  utilization 
of  by-products,  especially  blast  furnace  gas.  These  particular 
economies,  of  course,  could  be  availed  of  only  by  a  vertical  com- 
bination (an  integrated  concern);  a  horizcMrtal  combination  (a 
combination  of  plants  making  substantially  the  same  product) 
must  justify  itself,  if  at  all,  on  other  grounds;  must  point  to  other 
economies  than  those  mentioned.  On  this  phase  of  the  matter 
more  will  be  said  later,^  but  we  may  note  at  this  point  the  neces- 
sity of  keeping  clearly  in  mind  the  distinction  between  the 
economies  in  producing  and  selling  that  were  attainable  by 
such  of  these  combinations  as  did  not  possess  monopolistic 
power  (the  Carnegie  Company,  the  Federal  Steel  Company,  and 
the  National  Steel  Company,  for  example),  and  the  additional 
economies  that  might  be  secured  through  the  organization  of 
a  trust  (with  monopolistic  power),  as,  for  example,  the  American 
Tin  Plate  Company,  the  American  Steel  and  Wire  Company,  and 
the  National  Tube  Company.  The  economies  permitted  by 
integration  were  notable,  and  no  doubt  combinations  formed  to 
realize  them  were  in  the  public  interest.  Yet,  as  we  have  seen,  a 
number  of  these  early  steel  combinations  were  not  vertical 
combinations,  but  horizontal  combinations.  They  were  not 
organized  for  the  purpose  of  securing  the  advantages  of  integra- 
tion, but  the  profits  of  monopoly.  As  the  Circuit  Court  said: 
"Properties  were  assembled  and  combined  with  less  regard  to 
their  importance  as  integral  parts  of  an  integral  whole  than  to 
the  advantages  expected  from  the  elimination  of  the  competition 
which  theretofore  existed  between  them.''  ^ 

*  See  ch.  19. 

•  223  Fed.  Rep.  167. 


Another  gain  from^integration  was  the  possibility  it  offered  of 
securing  the  profite^which  would  otherwise  go  to  the  manufac- 
turers or  producers^of  the  products  at  the  earhVr  stagftR  Here 
was  an  opportunity  to  apply  Mr.  Rockefeller's  maxim,  "pay  a 
profit  to  nobody."  The  gain  was  especially  worth  while  because 
of  the  possibility  that  a  pool  or  combination  controlling  the 
necessary  raw  material  or  semi-finished  products  might  charge 
unreasonable  prices.  The  company  producing  its  own  raw 
materials  was  assured  an  ample  supply  of  them  at  cost  to  itself. 
With  it  companies  not  so  well  fortified  could  not  compete 

The  third  advantage  offered  by  Ihe-combination  4vas  the 
opportunity^of  mnkincju-nfitiT.  from  thr  lah  of  thr  securities 
of  the  consolidated  companies.  The  profits  which  were  made  in 
this  way  were  of  two  kinds:  first,  those  made  by  the  manufac- 
turers themselves;  and,  second,  those  made  by  the  promoters. 
That  the  promoters  had  a  direct  financial  inducement  to  form 
combinations  and  trusts  is  shown  by  the  fact  that  the  promoters 
of  seven  of  these  organizations  (Federal  Steel  Company,  Na- 
tional Steel  Company,  American  Tin  Plate  Company,  American 
Steel  and  Wire  Company  of  New  Jersey,  National  Tube  Com- 
pany, American  Steel  Hoop  Company,  American  Bridge  Com- 
I>any)  received  in  the  aggregate  over  $63,000,000  in  stock  as  their 
pay.*  This  was  not  all  profit,  to  be  sure,  but  to  say  that  the 
compensation  was  very  liberal  is  expressing  it  mildly.  The 
profits  were  likely  to  be  greater,  of  course,  when  the  promoters 
were  successful  in  establishing  a  trust  than  when  they  simply 
eflfected  a  combination  possessing  no  monopolistic  power.  Some 
of  these  iron  and  steel  combinations,  as  has  been  shown,  be- 
longed to  one  class;  some,  to  another. 

The  underlying  motive  in  the  formation  of  the  steel  combina- 
tions and  trusts  of  1898-1900  was,  as  we  have  seen,  th^  restric- 
tion or  smothering  of  competition.  Yet  competition,  though 
greatly  restrained  in  several  branches  of  the  steel  industry,  was 
not  destroyed.  Indeed  it  soon  appeared  that  the  formation  of 
these  combinations  was  likely  to  lead  to  even  more  vigorous 

^  See  p.  287. 


competition  than  ever.  This  unexpected  outcome  was  the 
result  of  an  attempt  on  the  part  of  some  of  these  combinations 
to  integrate  themselves  so  fully  that  they  would  be  entirely 
independent  of  any  other  steel  concern.  To  ward  oflF  the  threat- 
ened competitive  struggle,  the  United  States  Steel  Corporation 
was  formed.  The  circumstances  leading  up  to  its  formation 
may  be  considered  in  some  detail. 

The  combinations  already  described  may  be  roughly  divided 
into  two  groups:  (i)  {JTejrimary  grniip^  including  the  Carnegie 
Company,  the  Federal  Steel  Company,  and  the  National  Steel 
Company,  concerns  manufacturing  chiefly  semi-fini^ed  steel 
and  the  heavy  steel  products;  (2)  the  secondary  group,  including 
the  American  Tin  Plate  Company,  the  American  Steel  and  Wire 
Company,  the  National  Tube  Company,  the  American  Steel 
Hoop  Company,  the  American  Sheet  Steel  Company,  the 
American  Bridge  Company,  and  the  Shelby  Steel  Tube  Com- 
pany, concerns  manufacturing  chiefly  the  lighter  and  more  highly 
elaborated  steel  products.  The  companies  in  the  secondary 
group  were~la7geTy7~some  almost  entirely,  dependent  on  the 
primary  group  for  the  semi-finished  steel  which  constituted 
their  raw  material;  while  the  primary  group,  in  turn,  disposed  of 
a  large  part  of  its  output  to  the  secondary  group.  There  was 
thus  a  marked  interdependence  among  the  two  groups,  and  for 
a  while  all  went  well. 

This  state  of  harmony,  however,  was  not  to  endure.  During 
1900  the  steel  trade  suffered  a  reaction,  which  made  necessary 
the  reduction  of  expenses,  if  returns  large  enough  to  pay  divi- 
dends on  watered  stock,  were  to  be  realized.  Some  of  the 
concerns  in  the  secondary  group  soon  proposed  therefore  to 
integrate  themselves  still  further,  and  thus  to  obtain  their  raw 
material  at  cost.  The  American  Steel  and  Wire  Company  of 
New  Jersey,  for  example,  made  plans  to  build  additional  blast 
furnaces  and  a  large  steel  plant.  The  Carnegie  Company  and 
the  Federal  Steel  Company,  both  of  which  had  just  enlarged 
their  works,  therefore  faced  the  loss  of  a  market  for  a  consider- 
able part  of  their  output.  To  protect  themselves,  they  decided 
to  produce  the  more  highly  elaborated  products,  thus  making  use 


of  nearly  their  entire  semi-finished  steel  output  and  freeing 
themselves  from  their  dependence  on  other  steel  manufacturers. 
In  1900  the  Federal  Steel  Company  proposed  to  undertake  the 
manufacture  of  tubes  and  structural  material.  In  the  summer  of 
1900  it  was  reported  that  the  Carnegie  Company  would  engage 
on  a  large  scale  in  the  manufacture  of  wire  rods.  In  January, 
1901,  the  Carnegie  Company  announced  that  it  proposed  to 
build  at  Conneaut  Harbor,  Ohio,  the  largest  pipe  and  tube  plant 
in  the  world.^  The  impression  was  current  that  the  Carnegie 
Company  would  eventually  make  tin  plate,  sheet  steel,  and  other 
finished  products.  The  outcome  of  this  policy  of  retaliation 
would  clearly  be  two-fold :  first,  an  increase  in  the  country's  pro- 
ductive capacity  far  beyond  its  normal  consuming  power;  and, 
second,  an  abrupt  termination  of  the  monopolistic  or  semi- 
monopolistic  position  attained  by  the  concerns  in  the  secondary 

A  severe  competitive  struggle  thus  seemed  imminent.  And  in 
such  a  struggle  it  was  generally  believed  that  the  Carnegie  Com- 
pany would  emerge  the  victor.  This  concern  was  credited  with 
owning  the  best  equipped  and  best  managed  steel  plant  in  the 
country,  if  not  in  the  world.  In  self-sufl5ciency  of  product  it  was 
well  ahead  of  its  rivals.  In  fact,  there  seems  to  have  been  little 
doubt  that  from  the  manufacturing  standpoint  the  Carnegie 
Company  would  have  proved  more  than  a  match  for  its  com- 
petitors, many  of  whom,  in  their  endeavor  to  monopolize  the 
business,  had  been  obliged  to  acquire  at  high  prices  numerous 
inferior  plants.  From  the  banking  and  financial  standpoint  the 
Carnegie  Company  was  equally  well  fortified.  It  had  ample 
capital  and  credit;  and  its  securities  were  closely  held,  hence  its 
owners  were  uninfluenced  by  stock  market  considerations.  As 
Mr.  Carnegie  had  remarked,  the  partners  knew  nothing  about 
the  manufacture  of  bonds  and  stocks;  they  knew  only  about  the 
manufacture  of  steel.  The  Morgan  companies — the  Federal 
Steel  Company,  the  National  Tube  Company,  and  the  American 
Bridge  Company — naturally  had  excellent  financial  backing,  but* 

1  Brief  for  the  United  States  (no.  481),  vol  II,  pp.  479-481. 


the  Morgan  financiers  were  lied  up  in  other  lines,  particulariy 
railroad  enterprises,  and  they  did  not  welcome  a  steel  war.  The 
Lake  Superior  Consolidated  Iron  Mines  with  Rockefeller  support 
'  could,  of  course,  have  weathered  any  struggle,  but  this  company 
was  not  engaged  in  steel  manufacturing,  and  therefore  was  not 
directly  concerned.  The  remaining  comjjanies,  however,  mostly 
Moore  concerns,  were  very  heavily  overcapitalized,  and  had  a 
highly  speculative  backing.  The  promoters  of  these  companies 
had  not  yet  had  sufficient  time  to  unload  on  the  public,  and  so 
far  as  they  were  concerned  a  trade  war  had  to  be  prevented  at  all 
hazards.  Could  the  conflict  be  averted,  the  promoters  could 
await  a  favorable  opportunity  for  the  disposal  of  the  stocks  held 
by  them,  and  they  might  even  realize  some  additional  profits 
through  the  sale  of  the  securities  of  the  consolidated  company 
on  the  rising  market  that  would  follow  the  restoration  of  har- 
monious relations. 

The  resiJt  of  this  situation  was  the  formation  of  the  present 
steel  trust.  On  February  25,  1901,  the  United  States  Steel 
Corporation  was  incorporated  under  the  laws  of  New  Jersey 
(with  an  authorized  capital  stock  of  $3,000),  in  accordance  with  a 
plan  to  acquire  the  seciuities  of  the  Carnegie  Company,  the 
Federal  Steel  Company,  the  National  Steel  Company,  the 
American  Tin  Plate  Company,  the  American  Steel  and  Wire 
Company,  the  National  Tube  Company,  the  American  Steel 
Hoop  Company,  and  the  American  Sheet  Steel  Company.*  The 
offer  of  the  Steel  Corporation  to  exchange  its  seciuities  for  those 
of  the  companies  named  was  promptly  accepted  by  a  great 
majority  of  the  stockholders  (over  98  per  cent  in  each  case) ;  and 
therefore  on  April  i  the  Corporation  filed  amended  articles  of 
incorporation  whereunder  its  authorized  capital  stock  was 
increased  to  $1,100,000,000.^  By  this  process  of  exchange 
(when  completed)  the  Steel  Corporation  became  strictly  a  hold- 
ing company  trust.  Shortly  thereafter  it  acquired  the  American 
Bridge  Company,  the  Lake  Superior  Consolidated  Iron  Mines, 

*  Chron.,  72,  p.  441  (March  2,  1901). 

*  Chron.,  72,  p.  679  (April  6,  1901).    For  the  terms  of  the  exchange  see 
Brief  for  the  United  States  (no.  481),  vol.  I,  pp.  54-56. 



the  Bessemer  Steamship  Company,  and  the  Shelby  Steel  Tube 

The  restriction  of  competition  was  plaiiil^^^fijiiaia-HlQtive 
for  the  formation  of  the  Steel  Corporation  JWe  should  not  be^. 
surprised,  therefore,  to  learn  that  not  only  was  the  decline  in 
pnces  then  taking  place  arrested,  but_^at_prices  were  actually 
advanced.  This  is  shown  by  the  table  below,  giving  the  average 
monthly  price  of  certain  iron  and  steel  products  in  October,  1900 
Oust  prior  to  the  negotiations  leading  to  the  organization  of  the 
Steel  Corporation),  and  their  price  in  May,  1901,  the  first  month 
after  the  organization  of  the  Corporation. 

Average  Price  of  Cbstain  Iron  and  Steel  Products  in    October, 

1900,  AND  May,  1901  • 

(Per  gross  ton) 


October,  igoo 

May,  igoi 

Piir  iron  * 









Plates « 



Structural  shapes  (beams)  * 
Tin  plates* 

Wire  iwils  * 


Sheets  (black)  * 

Tlioiigh  the  restriction  of  competition  was  the  controlling 
motive  in  the  organization  of  the  Steel  Corporation,  at  least  two 
other  influences  were  present.   One  was  the  desire  to  seaire  large 

^For  a  list  of  the  subsidiaiy  concerns  controlled  by  the  constituent 
companies  of  the  United  States  Steel  Coiporation,  see  Brief  for  the  United 
States  (no.  481),  vol.  n,  pp.  753-762. 

'  Judge  Woolley  in  a  separate  opinion  in  the  steel  trust  case  said  that  his 
conclusions  of  fact  and  of  law  were  that  the  organizers  of  the  Corporation 
intended  to  create  a  monopoly  and  to  restrain  trade.    223  Fed.  Rep.  178. 

'  Brief  for  the  United  States  (no.  481),  vol.  I,  pp.  48,  62. 

*  F.  o.  b.  Pittsburg. 

*  F.  o.  b.  Pennsylvania  manufacturing  plants. 

*  F.  o.  b.  New  YoA. 


profits  through  the  sale  of  the  seniritiea  of  ^^  new  roTppfliiy. 
This  matter  is  discussed  iii  chapter  XII;  it  will  suffice  here  to 
point  out  that  the  underwriting  S3mdicate  realized  a  profit  of 
$62,500,000  through  the  promotion  of  the  Steel  Corporation. 

Another  reason  for  the  organization  of  the  Steel  Corporation 
wjtsthe  desirability  of  integrating  the  business  more  fidly ,  and  of 
securing  the  economies  of  the  tnist  Jorni  of  organization.  TTiese 
two  considerati<Mis,  ta  repeat,  must  Be  sharply  distinguished. 
Complete  integration  can  be  secured  without  resort  tojato^ist, 
i.  e.,  without  attaining  a  monopolistic  position  at  any  stage  in  the 
process  of  production,  whereas  the  economies  of  the  trust  form  of 
organization  can  be  secured,  of  course,  only  by  a  trust.  The 
significant  inquiry  always  is:  can  a  trust  produce  more  cheaply 
than  a  combination,  more  cheaply  even  than  a  highly  int^;rated 
combination?  If  it  can,  anti-trust  l^islation  is  likely  to  prove 
futile.  Now  the  organization  of  the  Steel  Corporation  did  lead 
to  a  somewhat  greater  degree  of  integration.  The  bringing  to- 
gether xmder  one  control  of  the  iron  ore  mines,  the  iron  ore  rail- 
roads, the  Lake  vessels,  the  coking  coal  properties,  and  the  plants 
making  all  kinds  of  iron  and  steel  products  meant  that  the  Coi;- 
poration  was  quite  independent  of  others,  and  that  no  profits  at 
any  stage  in  the  productive  process  need  to  be  paid  to  anyone 
else.  So  far  as  the  manufactiuing  processes  were  concerned,  it  is 
doubtful  whether  anything  particular  was  gained;  the  advan- 
tages of  integration  were  already  about  as  fully  realized  by  the 
larger  and  stronger  of  the  constitutent  companies,^  such  as  the 
Carnegie  Company,  or  if  not  already  realized,  would  have  been 
upon  the  completion  of  the  extensions  proposed  in  1900  to  1901. 

As  to  the  economies  of  the  trust  form  of  organization  detailed 
information,  as  usual,  is  difficult,  if  not  impossible,  to  secure.^ 

'  Rqx>rt  of  the  Commissioner  of  Coiporadons,  part  I,  p.  108. 

'  The  Bureau  of  Coiporations  in  part  III  of  its  Rqwrt  on  the  Steel  Indus- 
try made  a  study  of  the  cost  of  producing  various  steel  products,  but  its 
investigation  threw  no  light  on  the  costs  of  the  Steel  Coiporation  as  com- 
pared with  the  costs  of  other  laige  and  well  integrated  concerns.  In  fact, 
the  Bureau,  in  order  to  protect  the  privacy  of  business,  particularly  refrained 
from  giving  any  figures  which  would  reveal  the  costs  at  the  several  inde- 
pendent plants. 


It  is  probable  that  the  steel  trust,  simply  because  it  was  a  trust, 
did  effect  certain  savings.  The  combining  of  so  many  manu- 
facturing properties  imder  one  management  probably  made 
possible  a  more  economical  subdivision  of  the  business  whereby 
particular  plants  could  specialize  on  certain  products,  with 
a  consequent  reductioaJn  cost.  The  distribution  of  the  Steel 
Corporation's  plants  also  gave  it  an  important  advantage 
with  respect  to  transportation  costs;  it  could  ship  from  the 
nearest  mill,  and  thus  save  cross  freights.^  Savings  were  \m- 
doubtedly  effected  through  competition  between  the  managers, 
of  the  different  plants;  and  a  more  complete  utilization  was  made 
of  cjPTfsi\n  hy-proHiirtj;^  such  as  blast  fumace  slag  (used  in  the 
manufacture  of  cement),  which  was  formerly  a  waste  product.* 
No  doubt,  also,*  the  large  capital  possessed  by  the  Steel  Corpora- 
tion assisted  it  in  developing  tb<^  ^yp^^^  tradp — claimed  by  the 
promoters  to  be  one  of  the  principal  reasons  for  forming  the 
Corporation — ^but  it  does  not  follow  that  the  amoxmt  of  capital 
required  could  have  been  supplied  only  by  a  trust.  How  im- 
portant the  above  enumerated  economies  were  it  is  not  possible 
to  say,  but  in  view  of  the  rapid  growth  of  the  independent  con- 
cerns, as  described  later,  it  is  not  likely  that  they  were  control- 
ling. Certainly  few,  if  any,  economies  were  achieved  by  the 
trust  in  the  selling  end;  selling  expenses  in  the  iron  and  steel  trade 
are  a  COThparatively  minor  factor.'  In  fact,  the  Commissioner  of 
Corporations  believes,  the  argument  of  economy  in  production 
was  probably  brought  forward  to  justify  the  establishment  of  the 

trust,  and  to  promote  the  sale  of  the  company's  securities;  the 


1  Mr.  Schwab  at  a  dinner  held  on  December  12,  1900,  discussed  the  ad- 
vantages that  might  be  derived  from  a  combination,  and  referred  specifically 
to  specialization,  locatbn  of  plants  near  the  centers  of  con^unption,  com- 
petition of  the  several  managements,  reduction  in  overheaa  expense,  and 
the  development  of  the  export  trade.  He  expressed  the  opinion  that  from  a 
metalhugical  or  mechanical  standpoint  the  limit  of  economies  had  been 
reached,  or  nearly  so,  so  highly  perfected  had  the  processes  of  manufacture 
become.    Brief  for  the  United  States  (no.  481),  vol.  II,  pp.  508-510. 

"Brief  for  the  United  States  Steel  Coiporation  (no.  481),  pp.  106- 

'  Report  of  the  Commissioner  of  Corporations,  part  HI,  pp.  20-21. 


main  reason  for  the  organization  of  the  Steel  Corporation  was 
certainly  the  hope  of  averting  tlie  thrfiatening.  competitive 

The  capitalization  of  the  Steel  Corporation  was  enormous. 
Under  its  amended  certificate  of  incorporation  it  issued  $304,- 
000,000  of  bonds,  exclusive  of  $81,000,000  underlying  indebted- 
ness, and  was  authorized  to  issue  $1,100,000,000  of  stock,  half 
preferred  and  half  common.  All  of  the  bonds  and  $425,000,000 
of  each  class  of  the  stock  were  issued,  mainly  in  exchange  for  the 
seciudties  of  the  companies  first  acquired.^  Shortiy  after  its 
organization  the  Corporation  acquired  the  Lake  Superior  Con- 
solidated Iron  Mines  and  other  concerns,  and  as  a  result  its  issue 
of  each  class  of  stock  increased  to  over  $500,000,000,  making  a 
total  stock  issue  of  over  $i,opo,ooo,ooo.  The  Steel  Cor- 
poration, measured  by  capitalization,  and  perhaps  by  any 
test,  was  the  largest  industrial  corporation  the  country  had 
yet  produced. 

The  company  upon  its  organization  controlled  three-fifths  of 
the  steel  business  of  the  country.'  It  produced  almost  60  per 
cent  of  the  pig  iron  used  for  steel  making  purposes,  about  66  per 
cent  of  the  crude  steel  output,  and  about  50  per  cent  of  the 
finished  steel  products  in  the  manufacture  of  which  it  was 
engaged.  It  had  hundreds  of  millions  of  tons  of  iron  ore;  over 
50,000  acres  of  the  best  coking  coal  lands;  over  1,000  miles  of 
railroad,  including  the  iron  ore  railroads;  more  than  one  hundred 
Lake  vessels;  and  large  miscellaneous  holdings,  such  as  docks, 
natural  gas  and  limestone  properties.  Yet  despite  its  enormous 
size  the  Steel  Corporation  did  not  secure  a  monopoly  of  the  iron 
and  steel  industry,  though  in  certain  lines  its  position  was  dis- 
tincUy  monopolistic.^    This  is  indicated  by  the  following  table, 

^  Report  of  the  Commissioner  of  Corporations,  part  I,  pp.  108-109. 

*  Ibid.,  p.  106. 

*  Ibid.,  p.  109. 

*  That  its  position  was  not  even  more  monopolistic  in  certain  lines  resulted 
from  the  fact  that  some  of  the  constituent  trusts  had  lost  heavily  in  their 
percentage  of  the  country's  trade  since  their  oiganization  some  two  or  three 
years  previous.  See  on  this  point  Brief  for  the  Steel  Corporation  (no.  481), 
p.  77,  and  223  Fed.  Rep.  134, 


showing  the  Steel  Corporation's  computation  of  its  proportion  of 
the  country's  output  of  the  leading  products  in  1901.^ 

Per  cent 

Pig  iron,  spiegel  and  ferromanganese 43 . 2 

Steel  ingots  and  castings 65 . 7 

Rails 59.8 

Structural  shapes 62 . 2 

Plates  and  sheets 64.6 

Black  plate  produced  in  tin  mills 79.8 

Coated  tin-miU  products 73 .  i 

Black  and  coated  sheets  produced  in  tin  mills  67 . 3 

Wire  rods 77.7 

Wire  nails 68 .  i 

Wrought  pipe  and  tubes 57.2 

Seamless  tubes 82.8 

Among  the  more  important  rivals  of  the  Steel  Corporation 
in  1901  were  Jones  and  Laughlin,  the  Lackawanna  Iron  and 
Steel  Company,  the  Republic  Iron  and  Steel  Company,  the 
Pennsylvania  Steel  Company,  the  Cambria  Steel  Company,  and 
the  Bethlehem  Steel  Company.  The  Colorado  Fuel  and  Iron 
Company  because  of  its  location  was  not  an  effective  rival, 
though  the  Steel  Corporation  conducted  negotiations  looking 
toward  its  acquisition;  and  the  Tennessee  Coal,  Iron  and  Rail- 
road Company  was  at  this  time  chiefly  engaged  in  the  produc- 
tion of  foimdry  pig  iron. 

The  capitalization  of  the  Steel  Corporation  as  noted  above 
was  enormous.  But  so  was  the  amoimt  of  property  acquired. 
Was  the  Corporation  overcapitalized? 

The  capitalization  of  the  company  in  1901  after  the  acquisi- 
tion of  the  Shelby  Tube  Company  (in  August)  was  as  follows:  ^ 

Steel  Corporation  bonds $303^50,000 

Underlying  bonds 59,091,657 

Purchase  money  obligations,  etc 21,872,023 

Preferred  stock 510,205,743 

Common  stock 508,227,394 

Total $1,402,846,817 

^  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  365.  See  also 
p.  214.  *  Ibid.,  p.  14. 


The  Bureau  of  Corporations  made  a  detaUed  study  of  the  value 
of  the  properties  of  the  Steel  Corporation  in  1901  in  order  to 
determine  whether  the  company  was  overcapitalized,  and  if  so, 
to  what  extent.  Three  different  methods  were  employed.  The 
first  method  was  an  historical  study,  an  analysis  of  the  invest- 
ment of  the  constituent  companies  at  the  time  of  their  organiza- 
tion. The  second  method  was  a  mathematical  computation,  a 
summation  of  the  market  value  of  the  securities  of  the  constitu- 
ent companies,  using  the  average  weekly  prices  from  the  date  of 
the  organization  of  these  combinations  up  to  December  31, 1900. 
The  market  prices  during  the  early  months  of  1901  were  not 
included,  since  these  were  naturally  influenced  by  the  prog)ec- 
tive  organization  of  the  Steel  Corporation.  This  second  method 
represented  the  estimate  put  by  the  public  on  the  securities  of 
the  constituent  companies,  and  it  therefore  reflected  the  prob- 
able earning  power  of  these  combinations.  The  ^hird  method 
was  a  physical  valuation,  a  detailed  estimate  of  the  physical 
properties  of  the  Steel  Corporation  by  departments  of  its  busi- 
ness, the  valuation  of  the  ore  properties  being  made  in  particular 
detail.  The  valuation  arrived  at  by  the  Bureau  by  the  first 
method  was  $676,000,000;  by  the  second  method,  which  included 
intangible  items,  $793,000,000;  and  by  the  third  and  more 
accurate  method,  $682,000,000.^ 

The  condusioiLof  the  Bureau,  therefore,  was  that  the  entire 
issue  of  conmion  stock  was  water,  i.  e.,  had  no  property  back  of 
it;  and  that  a  large  amount,  one-fifth  to  two-fifths,  of  the  pre- 
ferred stock  was  water.  Even  including  the  intangible  assets,  the 
conmion  stock  represented  nothing  but  the  hope  of  monopoly 
gains.  By  any  reasonable  standard,  therefore,  the  Steel  Corpora- 
tion was  very  heavily  overcapitalized. 

After  1901,  however,  the  Steel  Corporation  added  greatly  to 
its  investment.  This  it  did,  first,  by  thfi  construction  of  addi- 
tional plants  out  of  surplus  earnings  or  out  of  the  proceeds  of 
issues  of  seciurities;  and,  second,  by  the  acquisition  of  competing 
concerns  through  the  sale  of  its  own  securities.  The  most 
important  piece  of  new  construction  was  the  plant  at  Gary, 
*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  15. 


Indiana,  the  largest  steel  plant  in  the  world.  This  plant  up  to 
December,  191 1,  by  which  date  practically  all  the  construction 
then  authorized  had  been  completed,  had  cost  over  $62,000,000.^ 
Another  new  steel  plant  was  built  in  Duluth,  Minnesota,  and  a 
very  large  cement  works  was  constructed  in  Bufl^gton  (near 
Chicago)  by  the  Universal  Portland  Cement  Company,  a  sub- 
sidiary of  the  Steel  Corporation.  Other  important  additions  also 
were  made  by  the  Steel  Corporation  (through  its  subsidiaries). 

The  investment  of  the  Steel  Corporation  has  likewise  been 
increased  through  the  acquisition  of  competing  companies. 
In  1902  the  Steel  Corporation  purchased  the  Union  Steel  Com- 
pany, which  held  large  deposits  of  iron  ore  and  coking  coal;  and 
in  1904  it  acquired  all  the  stock  of  the  Clairton  Steel  Company, 
then  in  receiver's  hands,  but  in  the  possession  of  important  ore 
and  coking  coal  lands. 

Rut  far  more  important  was  the  piir^hafir  in  Nftv^mbpr,  1907, 
of  the  Tennessee  Coal^  Iron  and  Railroad  Company.  This 
company,  with  its  main  plant  located  at  Ensley,  Alabama,  was 
the  most  important  iron  and  steel  concern  in  the  south.  It  pro- 
duced 3  per  cent  of  the  country's  output  of  iron  ore,  2.9  per  cent 
of  the  output  of  coke,  2.4  per  cent  of  the  pig  iron,  i.i  per  cent  of 
the  ingots  and  castings,  and  4.3  per  cent  of  the  rails.^  Partly 
because  of  the  fact  that  all  the  essential  materials  were  assembled 
by  nature  within  a  radius  of  a  few  miles,  the  Tennessee  Company 
was  able  to  manufacture  pig  iron  cheaper  than  it  could  be  made 
in  any  other  section  of  the  United  States.'  The  company  was 
controlled  by  powerful  financial  interests;  and  improvements 
were  then  under  way  to  double  its  steel  output  and  rail  capacity. 
TTie  Tennessee  Company  made  open-hearth  steel  rails — in 
1907  it  produced  59.1  per  cent  of  the  total  output  of  open- 
hearth  rails — and  was  thus  in  a  position  to  profit  by  the  in- 
creasing demand  for  that  type  of  rail.^  But  the  most  impor- 
tant assets  of  the  Tennessee  Company  were  its  enormous  hold- 

^  Tenth  Annual  Report  of  the  Steel  Corporation,  p.  28. 

*  Report  of  the  Commissioner  of  Coiporations,  part  I,  p.  258. 
'  Brief  for  the  United  States  (no.  6214),  part  I,  p.  11. 

*  Ibid.,  (no.  481),  voL  II,  p.  731. 


ings  of  ore  and  coal;  it  owned  more  iron  ore  and  coal  adapted  for 
making  steel  than  any  company  in  the  United  States  except  the 
Steel  Corporation.^  There  can  be  no  doubt  that  the  desire  to 
secure  these  deposits  had  much  to  do  with  the  purchase  of  the 
company.  Moreover,  the  acquisition  of  the  Tennessee  Company 
made  it  impossible  for  it  to  effect  a  combination  with  the 
Republic  Iron  and  Steel  Company  and  the  Sloss-Sheffield 
Steel  and  Iron  Company,  as  had  been  planned,  and  thus  to 
become  an  even  more  formidable  competitor  of  the  United 
States  Steel  Corporation. 

The  construction  of  new  plants  and  the  acquisition  of  compet- 
ing plants  greatly  increased  the  investment  of  the  Steel  Corpo- 
ration. This  investment  in  1901,  as  shown  above,  was  $676,000,- 
000.  Between  1901  and  the  close  of  1910  the  investment  in- 
creased by  $504,928,653,  of  which  amount  about  $435,000,000 
was  provided  for  out  of  surplus  earnings.^  By  December  31, 
1910,  therefore,  the  total  investment  of  the  Steel  Corporation 
amoimted  to  $1,181,000,000.  The  capitalization  of  the  company 
on  the  same  date  was  $1,468,033,260,  or  about  $287,000,000  in 
excess  of  the  investment.  In  other  words,  about  $287,000,000 
of  the  Steel  Corporation's  stock  was  still  "water."  It  is  apparent 
that  after  1901  the  Corporation  squeezed  out  a  lai^e  part  of  the 
water  in  its  stock.  In  1901  the  amount  of  water  had  been  $726,- 
000,000,  using  the  actual  investment  as  the  basis  of  calculation, 
and  $720,000,000,  using  the  physical  valuation  as  the  basis.  By 
1910  the  amount  of  water  had  been  reduced  to  $287,000,000  by 
the  first  method  of  calculation,  and  to  $281,000,000  by  the  second. 
All  of  the  water  had  been  extracted  from  the  preferred  stock,  and 
about  half  of  the  water  from  the  conmion  stock. 

To  have  added  so  greatly  to  the  value  of  its  pn^)erty,  the 
earnings  of  the  Steel  Corporation  must  have  been  enormous. 
That  they  were  so  in  fact  is  indicated  by  the  table  below,  show- 
ing for  the  years  1901  to  1910 — the  government  dissolution  suit 

*  Brief  for  the  United  States  (no.  6214),  part  I,  pp.  lo-ii. 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  49.  This  increase 
in  the  investment  was  over  and  above  a  proper  allowance  for  maintenance, 
repairs,  and  depreciation. 



was  brought  in  191 1 — the  total  mvestment  of  the  Steel  Corpora- 
tion in  tangible  property,  the  net  earnings,  and  the  ratio  of  the 
net  earnings  to  the  investment* 

Year  ending 
December  ji 

Total  investment 

in  tangible  property. 

000  omitted 

Net  earnings  * 

000  omitted 

Per  cent 


$   698,869 







S  77,741 ' 







14.8  * 



15  9 

II. 7 



15. 1 
14..  4. 








y    f  •-'•-••••■•• 



m.\fKmj  J. 


y^y  •• 






The  table  shows  that  the  net  earnings  of  the  Steel  Corporation 
ranged  from  $62,000,000  in  1904  (its  worst  year)  to  $155,000,000 
in  1907  (its  best  year);  and  averaged  $112,000,000  for  the  ten 
year  period.  By  the  side  of  such  earnings,  the  profits  of  the 
Standard  Oil  Company,  large  as  they  were,  seem  small  indeed.^ 
The  table  shows  further  that  the  profits  of  the  Steel  Corporation 
from  1901  to  1910  averaged  12  per  cent  on  its  investment.  The 
average  rate  of  profit,  however,  underestimates  the  prosperity  of 

^  Report  of  the  Commtssioner  of  Corporations,  part  I,  p.  54. 

'  The  net  earnings  are  not  those  given  in  the  annual  reports  of  the  Steel 
Corporation;  the  Bureau  has  revised  the  Corporation's  figures  somewhat. 
Thus,  the  Corporation  deducted  interest  on  its  bonds  in  determining  its  net 
earnings;  the  Bureau  restored  these  interest  payments  to  the  net  earnings, 
as  it  was  desirous  of  finding  out  what  the  property  actually  earned  rather 
than  the  distribution  of  earnings  among  the  different  classes  of  security 
holders.  Other  changes  were  made  by  the  Bureau  in  arriving  at  its  figures 
of  net  earnings. 

'  Nine  months,  April  to  December. 

*  Indicated  rate  per  annum,  based  on  actual  earnings  for  nine  months. 

»  Cf .  p.  88. 


the  Steel  Corporation.  In  the  first  place,  the  investment  in- 
cluded a  large  amount  of  idle  property,  particularly  undeveloped 
iron  ore  lands;  and  this  naturally  tended  to  reduce  the  rate  of 
profit  on  the  investment.  But  more  important,  the  profit  of  12 
per  cent  covered  the  entire  investment,  whether  that  investment 
was  represented  by  5  per  cent  bonds,  7  per  cent  preferred  stock, 
or  common  stock.  The  rate  of  profit  on  the  investment  r^re- 
sented  by  common  stock  was  of  course  much  higher  than  12  i>er 
cent.  But  just  how  much  higher,  it  is  not  possible  to  say;  the 
Bureau  found  it  impossible  to  make  a  satisfactory  computation. 
The  net  earnings  of  the  Corporation,  the  sum  available  for 
dividends  on  its  common  stock,  and  the  percentage  earned  and 
paid  on  its  common  stock  during  the  years  1901  to  191 1  (the 
year  in  which  the  government  suit  was  brought)  are  shown  in 
the  table  below. 

Earnings  and  Dividends  of  the  Steel  Corporation,  1901  to  19 11 

Earned  on 


Paid  on 

Net  earnings} 

common  stock. 

common  stock 

common  stock 

000^000  omiUed 

000  yooo  omitted 

Per  cent 

Per  cent 














4  92 






•  •  •   • 





•  •  •  • 





I  50 









4  05 











5. 50 






In  view  of  the  fact  that  all  of  the  common  stock  was  "water," 
this  record  must  have  been  quite  gratifying  to  the  stockholders 
of  the  Corporation.    How  much  more  so  must  this  have  been 

^  After  deduction  of  expenses  for  ordinary  repairs  and  maintenance, 
interest  on  bonds,  fixed  charges  of  subsidiary  companies,  and  employees' 
bonus  funds.    Cf.  p.  211  (note). 

*  Nine  months  only. 


true  in  1916,  when  because  of  the  unusual  demands  for  steel 
arising  out  of  the  war  there  was  earned  on  the  common  stock 
$246,000,000,  or  48.46  per  cent! 

Yet  in  spite  of  the  large  sums  expended  in  the  construction  of 
new  plants,  in  spite  of  the  acquisition  of  important  competitors, 
and  in  spite  of  its  enormous  earnings,  the  Steel  Corporation  was 
not  able  to  maintain  the  prominent  position  which  it  held  at  its 
organization  in  1901.  This  is  indicated  by  the  table  on  page  214, 
showing  the  proportion  of  the  country's  business  done  by  the 
Steel  Corporation  in  the  various  lines  during  the  years  1901  to 
1910  ^  (the  last  year  prior  to  the  dissolution  suit). 

With  respect  to  iron  ore,  the  Steel  Corporation  maintained 
fairly  weU  down  to  1910  the  position  which  it  attained  in  1901. 
Regularly  after  its  formation  it  produced  about  45  per  cent  of  the 
total  output  of  iron  ore  (1904  was  an  ofiF  year).  In  1908  and 
1909,  indeed,  it  produced  even  more  proportionately  than  in 
1901,  yet  this  was  because  of  the  purchase  in  1907  of  the  Tennes- 
see Coal,  Iron  and  Railroad  Company,  producing  about  3  per 
cent  of  the  total  output  of  iron  ore.  But  since  80  to  90  per  cent 
of  the  ore  used  for  steel  making  purposes  comes  from  the  Lake 
Superior  region,  the  Steel  Corporation's  proportion  of  the  Lake 
shipments  gives  a  better  idea  of  its  importance  as  an  ore  pro- 
ducer. And  these  figures  tell  a  somewhat  different  story.  In 
1901  the  Steel  Corporation  controlled  over  61  per  cent  of  the  ore 
shipped  from  the  Lake  Superior  region;  in  1910  only  51  per  cent. 
This  points  to  a  relative  increase  in  the  business  done  by  the 
independent  element. 

In  the  production  of  coke  likewise  the  Steel  Corporation  lost 
ground  after  its  formation.  In  1902 — the  data  are  not  available 
for  1901 — it  produced  37.4  per  cent  of  the  country's  output  of 
coke;  in  1910  only  32.7  per  cent.  These  statistics,  however,  are 
for  the  total  output  of  coke,  and  not  simply  for  the  coke  used  in 
the  production  of  iron  and  steel.  The  Corporation  produced  a 
laiger  percentage  of  the  coke  used  in  the  iron  and  steel  industry 

*  Rqx>rt  of  the  Commissioner  of  Corporations,  part  I,  p.  364.  The  figures 
for  the  actual  production  of  the  Steel  Corporation  and  of  the  independents 
from  1901-1910  are  shown  on  pp.  360-363. 


Proportion  of  Country's  Output  op  Iron  Ore,  Coke,  and  Various 
Iron  and  Steel  Products  Controlled  by  the  United  States  Steei. 
Corporation,  1901-1910 

From  annual  statistical  reports  of  the  American  Iron  and 

Steel   Association 

Iron  ore: 

Total  production . . . 

Shipments  from 

Lake  region 


Pig  iron 

Pig  iron,  spiegeleisen, 


Ingots  and  castings: 




Rolled  products: 
Bessemer  steel  raib  . . 
Open-hearth  steel  rails 

Structural  shapes 

Plates  and  sheets. . . . 

Wire  rods 

Bars,  skelp,  etc 

Total  finished  rolled 

Secondary  products ': 

Wire  nails 

Tin  plates  and 
Teme  plates .... 




















57. 9 
31   I 







51  o 





73- 1 






























44. 5 


































45  o 


57. 3 





















^  Data  not  available. 

•  None  produced  by  the  Steel  Coiporation. 

'  These  are  the  only  secondary  products  for  which  data  are  available. 


than  these  figures  indicate.  Controlling,  as  it  did,  the  choicest 
coking  coal  lands  in  the  Connellsville  region,  it  was  well  situated 
with  respect  to  its  supplies  of  coking  coal. 

The  percentage  of  the  pig  iron  production  of  the  country 
controlled  by  the  Steel  Corporation  remained  practicaUy  un- 
changed between  1901  and  1910.  In  the  former  year  it  produced 
42.4  per  cent  of  the  total ;  in  the  latter  43.0  per  cent.  Here  again 
the  figures  are  for  the  total  production,  rather  than  the  produc- 
tion for  steel  making  purposes;  and  therefore  they  do  not  show 
the  real  importance  of  the  Steel  Corporation  in  this  field.  Yet  it 
b  evident  that  the  business  of  the  independents  increased  con- 
siderably, since  in  1910  they  produced  about  the  same  percentage 
as  in  1901,  despite  the  acquisition  by  the  Corporation  of  the 
Union  Steel  Company  and  the  Tennessee  Coal,  Iron  and  Rail- 
road Company. 

Summarizing  for  the  raw  materials,  it  appears  that  the  Steel 
Corporation  held  its  own  fairly  well,  though  its  favorable  show- 
ing resulted  in  part  from  the  purchase  of  important  competitors. 

The  best  single  index  as  to  the  Steel  Corporation's  position  in 
the  steel  manufacturing  industry  is  the  output  of  ingots  and 
castings.  In  1901  the  Corporation  produced  66.3  .per  cent  of  the 
country's  output  of  these  products,  but  in  each  succeeding  year 
it  lost  ground  relatively  until  by  1910  it  produced  only  54.7  per 
cent  And  this  decline  came  in  spite  of  the  purchase  of  impor- 
tant competitors.  To  be  sure,  the  Corporation's  total  output 
<rf  ingots  and  castings  has  increased  enormously  since  1901.  In 
1901  it  produced  only  8,854,820  tons;  in  1910, 14,179,369  tons. 
That  the  company,  despite  thb  growth,  did  not  hold  its  own  is 
due,  of  course,  to  the  even  more  rapid  growth  of  its  competitors. 
While  the  trust  did  60  per  cent  more  business  in  ingots  and  cast- 
ings in  1910  than  in  1901,  its  competitors  did  154  per  cent  more. 
This,  moreover,  can  not  be  explained  by  saying  that  a  large 
omcem  finds  it  more  difficult  to  increase  its  business  at  the 
same  rate  as  its  smaller  comj)etitors,  for  the  competitors  of  the 
Steel  Corporation  not  only  grew  at  a  faster  rate,  but  in  the 
aggregate  showed  an  absolute  increase  in  business  greater  than 
that  secured  by  the  Steel  Corporation,  including,  as  the  latter 


does,  the  Cam^e  Company,  easily  the  most  efficient  of  the  steel 
companies  prior  to  its  incorporation  in  the  trust.^  Though  the 
Steel  Corporation  was  not  able  to  increase  its  output  as  rapidly 
as  its  competitors,  nevertheless  it  produced  vastly  more  than  its 
nearest  competitor  in  point  of  size.  In  191 1  the  steel  ingot 
production  of  the  Corporation  was  16,856,914  gross  tons  (55.6 
per  cent  of  the  country's  output),  while  the  largest  independent 
concern — ^Jones  and  Laughlin — produced  only  1,690,845  tons,  or 
5.5  per  cent* 

With  respect  to  the  rolled  products,  taking  them  as  a  whole, 
the  Steel  Corporation  substantially  maintained  its  position.  In 
1901  it  produced  50.1  per  cent  of  the  total  output  of  rolled 
products;  in  1910,  48.1  per  cent.  In  individual  lines,  however, 
the  Steel  Corporation  lost  heavily.  In  1901  it  produced  62.2  per 
cent  of  the  structural  shapes;  in  1910,  only  51.3  percent  (theSteel 
Corporation's  output  of  structural  shapes  between  1901  and  1910 
increased  85  per  cent;  that  of  its  competitors  188  per  cent).  In 
1901  the  Steel  Corporation  made  64.6  per  cent  of  the  plates  and 
sheets;  in  1910,  only  48.0  per  cent  (the  Steel  Corporation  in- 
creased its  output  66  per  cent  between  1901  and  1910;  the  inde- 
pendents increased  their  output  223  per  cent).  In  1901  the 
Steel  Corporation  turned  out  77.6  per  cent  of  the  wire  rods;  in 
1910,  only  67.3  per  cent  (for  the  Steel  Corporation  this  repre- 
sented an  increase  of  42  per  cent;  for  its  competitors,  an  increase 
of  139  per  cent).  In  1901  the  Steel  Corporation's  output  of  wire 
nails  was  65.8  per  cent  of  the  total;  in  1910,  only  55.4  per  cent 
(between  1901  and  1910  the  Corporation's  output  increased  but 
9  per  cent;  that  of  its  competitors,  69  per  cent). 

The  maintenance  by  the  Corporation  of  its  position  in  rolled 
products  as  a  whole,  despite  the  decrease  in  these  individual 
lines,  seems  to  have  resulted  from  an  increase  in  TKe  production 
of  bars,  skelp,  etc.,  and  from  the  production  in  1908  to  1910  of  a 
large  proportion  of  the  open-he2^rth   rails,   the   Corporation 

1  The  Steel  Corporation's  output  of  ingots  and  castings  increased  between 
1901  and  1910  by  5,300,000  tons;  that  of  its  competitors  by  7,300,000  tons. 
Report  of  the  Commissioner  of  Corporations,  part  I,  pp.  360-363. 

*  Brief  for  the  United  States  (no,  481),  voL  I,  p.  152. 


having  produced  none  at  all  prior  to  1908.  With  respect  to 
Bessemer  rails,  the  Corporation  produced  59.9  per  cent  of  the 
country's  output  in  1901,  and  though  there  were  ups  and  downs 
in  the  years  that  foUowed,  it  produced  in  1910  almost  exactly 
the  same  percentage.  In  the  maintenance  of  this  position  the 
Corporation  was  greatly  aided  by  its  raih-oad  affiliations.  In  t 
191 1,  for  example,  one  or  more  directors  of  the  Corporation  was 
to  be  found  on  the  directorate  of  sixty-two  American  railroads, 
possessing  a  mileage  equal  to  almost  half  that  of  the  whole 
country.^  It  would  be  strange,  indeed,  if  these  connections  did 
not  bring  the  Steel  Corporation  some  business  which  otherwise 
would  have  gone  to  the  independent  rail  manufacturers. 

It  is  evident  that  the  high  degree  of  control  which  the  Steel 
Corporation  had  at  the  time  of  its  organization  was  being  grad- 
ually lost.  Even  in  the  lines  in  which  it  had  a  quasi-monopolis- 
tic position  in  1910,  it  had  lost  heavDy,  almost  without  excep- 
tion. This  decline  had  taken  place,  moreover,  in  spite  of  the 
diversity  of  the  businesses  into  which  the  influence  of  the  Steel 
Corporation  ramified.  From  its  organization  the  officers  or  di- 
rectors of  the  company  were  at  various  times  on  the  directorate 
of  a  vast  number  of  industrial  companies.  The  Steel  Corpora- 
tion's connections  with  industrial  companies  and  railroads,  all 
large  buyers  of  iron  and  steel,  naturally  attracted  to  it  a  great 
deal  of  business.  Furthermore,  the  Corporation  had  powerful 
moneyed  connections.  At  some  time  after  its  organization  it 
had  directors  on  as  many  as  eighty-five  different  banks  and 
trust  companies,  and  twenty-five  insurance  companies.^  In 
addition,  according  to  Mr.  Gary,  it  made  a  practice  of  keeping 
about  seventy-five  million  dollars  in  cash  on  deposit  in  banks.* 
The  government  in  its  petition  went  so  far  as  to  charge  that  the 
Corporation  had  built  up  '^  a  system  of  interlacing  of  directorates 

^  Brief  for  the  United  States  (no.  6214),  part  U,  p.  287. 


■  Senate  Rqx>rt  no.  1326,  62nd  Cong.,  3rd  Sess.,  p.  824.  On  December 
3X1  i9i3f  none  of  the  competitors  of  the  Corporation  had  a  capitalization 
equal  to  the  amount  of  cash  held  by  the  Steel  Corporation.  Brief  for  the 
United  States  (no.  481),  vol.  I,  p.  138. 


which  embraced  abnost  the  entire  commercial  and  financial 
powers  of  the  country.^ 

While  the  fact  of  the  decline  in  the  relative  importance  of  the 
Steel  Corporation  is  clear,  the  explanation  thereof  is  not' so 
clear.  Possibly  those  in  charge  of  the  Corporation,  fearing 
dissolution  proceedings,  did  not  attempt  to  retain  their  original 
degree  of  control  of  the  steel  business  of  the  country.  The 
decision  of  the  Circuit  Court  refusing  fo"^nter  a  dissolution 
decree  because  the  Steel  Corporation  had  not  been  able  to  hold 
its  own  would  appear  to  justify  such  a  policy.  On  the  other 
hand,  not  until  after  1910  were  any  of  the  great  trusts  dissolved, 
and  it  is  therefore  doubtful  whether  fear  of  the  law  provides  the 
real  explanation.  Possibly,  to  give  another  explanation,  the 
guiding  spirits  of  the~Sl»eL  .Corporation  preferred  to  maintain 
the  prices  of  iron  and  steel  productv~cven  at  the  loss  of  a  pro- 
portionate share  in  the  country's  growing  business, — as  a  means 
of  squeezing  out  the.  water  from  the  company's  stock,  and  of 
putting  it  on  a  more  secure  foundation.  In  support  of  this  view 
it  may  be  said  that  during  periods  of  industrial  depression  the 
proportion  of  the  Corporation's  output  to  the  total  was  gener- 
ally smaller  than  its  proportion  of  capacity,  owing  to  its  policy 
of  maintaining  prices.  Thirdly,  perlyjp*;  the  true  eypjanation 
is  the  absence  of  any  important  economies  in  the  trust  form  of 
organization;  the  sceptic  would  seem  to  find  here  ground  for  his 

» P.  62. 

'  There  is  much  testimony  as  to  the  ability  of  the  Steel  Corporation  to 
eliminate  its  competitors.  Most  of  the  witnesses  in  the  government  suit 
agreed  that  the  cost  of  converting  the  raw  materials  into  the  finished  prod- 
ucts (conversion  cost)  was  practically  the  same  for  the  Steel  Corporation  as 
for  the  leading  independent  concerns.  Mr.  Donner,  president  of  the  Cam- 
bria Steel  Company,  and  formerly  a  director  of  the  American  Tin  Plate  Com- 
pany, testified  that  in  his  opinion  the  Steel  Corporation  could  not  put  its 
competitors  out  of  business  "without  committing  suicide/'  that  if  the  Cor- 
poration were  to  make  prices  so  low  that  there  was  no  profit  for  the  Cambria 
concern,  there  would  be  nothing  left  for  the  Corporation.  (Brief  for 
the  United  States,  no.  481,  vol.  U,  Summaiy  of  Evidence,  p.  855.) 
A  mill  with  a  capacity  of  40,000  to  50,000  tons  of  ingots  per  month, 
if  properly  designed  and   operated,  ought,  he   said,   to  compete  with 


Even  in  the  absence  of  important  economies,  however,  a  trust 
might  hold  its  own,  could  it  avail  itself  of  certain  props  to  main- 
tain its  position.  The  Standard  Oil  Company,  as  we  have  seen, 
found  its  main  strength  in  certain  objectionable  features,  such 
as  rebates,  control  of  pipe-lines,  and  unfair  selling  methods.  Had 

the  Coiporation  in  any  of  its  plants.     (Ibid.,  p.   868.)    Mr.   Schwab, 
president  of  the  Bethlehem  Steel  Company  and  formerly  president  of 
the  Corporation  itself,  testified  that  the  mill  cost  of  the  Corporation  at  Pitts- 
burg or  Gary  did  not  differ  materially  from  the  mill  cost  at  Bethlehem; 
that  the  limit  of  metallurgical  and  mechanical  possibilities  had  been  reached, 
and  that  the  conversion  cost  in  all  mills  throughout  the  United  States  was 
practically  uniform.    (Ibid.,  p.  868.)    Mr.  Corey,  formeriy  president  of  the 
Corporation,  declared  that  the  cost  of  production  at  the  Carnegie  works  was 
never  materially  less  after  the  formation  of  the  Corporation  than  it  had  been 
in  1901,  at  the  time  the  Carnegie  works  were  acquired.    (Ibid.,  p.  869.) 
Mr.  Farrell,  then  president  of  the  Corporation,  enumerated  fourteen  different 
steel  companies  which  the  Corporation  could  not  put  out  of  business  without 
committing  financial  suicide.    (Ibid.,  p.  859.)    (Whatever  may  be  the  verdict 
with  respect  to  the  leading  independent  concerns,  it  is  much  to  be  doubted, 
Mr.  Farrell  to  the  contrary  notwithstanding,  whether  some  of  these  fourteen 
companies,  such  as  the  Wheeling  Steel  and  Iron  Company — ^with  a  steel  ingot 
output  of  less  than  i  per  cent  of  that  of  the  Corporation — produced  on  a 
large  enough  scale  to  compete  effectively  with  the  Corporation.)    On  the 
other  hand,  Mr.  Campbell,  president  of  the  Youngstown  Sheet  and  Tube 
Company,  when  asked  whether,  taking  into  account  the  extent  of  the  ore 
holdings  of  the  Corporation,  its  ownership  of  railroads,  the  extent  of  its 
capitalization,  the  character  of  men  interested  in  it  and  their  relations  to 
banking  circles  and  railroads,  the  Corporation  had  the  power  to  put  its 
competitors  out  of  business,  replied,  "I  think  they  would  have  the  power; 
yes,  sir  ...  I  think  if  Judge  Gary  would  happen  to  die  to-night  that  there 
would  be  a  good  many  steel  people  that  would  lie  awake  until  his  successor 
was  appointed.    (Ibid.,  pp.  850-851.)    Mr.  Schwab  testified  that  it  cost  his 
company  more  to  make  steel  rails  than  it  did  the  Corporation,  because  his 
company  did  not  transport  its  own  ore.    (Ibid.,  p.  868.)  Judge  Gary,  the  real 
bead  of  the  Steel  Corporation,  testified  in  1908  that  the  Corporation  could 
produce  pig  iron  cheaper  than  its  competitors;  that  although  the  mill  costs  of 
production  were  about  the  same  for  the  Corporation  as  for  some  of  the  other 
companies,  yet  by  reason  of  the  control  of  the  best  ores  the  Corporation  could 
undersell  them.    (Ibid.,  p.  868.)    The  conclusion  would  seem  to  be  that  the 
Corporation  by  virtue  of  its  ownership  of  the  cream  of  the  ore  and  coking 
coal  lands  and  of  the  iron  ore  raOroads  (not  to  mention  its  financial  connec- 
tions) had  an  advantage  over  its  competitors,  but  that  this  advantage  did  not 
demonstrate  the  superior  economy  of  the  trust  form  of  organization.   Rather 


the  officials  of  the  Steel  Corporation  been  so  minded,  or  did  the 
nature  of  the  business  permit,  the  Steel  Corporation  might 
have  followed  a  similar  policy.  But  such  has  not  been  the  case. 
In  the  first  place,  the  Steel  Corporation  was  not  the  recipient  of 
rebates  from  the  railroads.  Mr.  James  R.  Garfield  testified  in 
the  steel  dissolution  case  that  he  made  an  investigation  of  the 
relations  of  the  railways  to  the  Steel  Corporation  similar  to  the 
investigation  made  into  the  oil  business,  and  he  found  no  evi- 
dence of  the  Steel  Corporation  having  received  any  rebates.^ 
Judge  WooUey,  of  the  District  Coiut,  stated  that  there  was 
nothing  in  the  evidence  that  suggested  that  the  Steel  Corporation 
used  its  power  as  a  means  of  seciuing  rebates;  on  the  contrary 
it  appeared  that  early  in  its  history  the  Corporation  promul- 
gated a  rule  against  soliciting  and  accepting  rebates.^  The 
contrast  in  this  respect  with  the  Standard  Oil  Company  is  note- 
worthy. The  Steel  Corporation,  with  its  iron  ore  railroads, 
has  not,  it  is  true,  lived  up  to  its  obligations  as  a  common  carrier, 
but  the  iron  ore  railroads  cut  by  no  means  the  same  figure  in  this 
industry  as  do  the  crude  oil  pipe-lines  in  the  oil  industry.  More- 
over, the  Steel  Corporation  did  not  endeavor  to  coerce  dealers 
or  consxuners  into  dealing  with  it  exclusively.*  Neither  did 
it  resort  to  local  price  cutting  as  a  means  of  restraining  competi- 
tive business.  Whether  it  would  haveidone  so  had  ciramistances 
permitted  can  not  be  said;  the  conditions,  as  a  matter  of  fact, 
did  not  permit.  On  this  point  the  Circuit  Court  said:  "Under 
conditions  incident  to  the  steel  trade  the  power  of  a  large  com- 
pany to  carry  on  a  ruinous  trade  war  against  any  particular 
competitor  does  not  exist  in  the  iron  and  steel  industry.  The 
customers  of  the  great  steel  companies  are  large  jobbers  and  the 
purchasing  agents  of  other  companies,  who  are  in  the  closest 

it  demonstrated  the  many-sidedness  of  the  trust  problem  and  the  inabOity 
to  achieve  results  in  the  way  of  restoring  competition  except  by  the  adoption 
of  a  legislative  policy  that  takes  into  account  the  many  favoring  favors  that 
lie  at  the  basis  of  the  apparent  success  achieved  by  some  trusts. 

^  Brief  for  the  Steel  Corporation  (no.  481),  p.  119. 

'223  Fed.  Rep.  171.  See  also  Brief  for  the  Steel  Corporation  (no.  4S1), 
pp.  1 19-120. 

•  Brief  for  the  Steel  Corporation  (no.  481),  p.  126. 



touch  with  every  fluctuation  of  the  steel  market.  The  result  is 
that  any  eflFort  on  the  part  of  any  one  of  these  great  steel  com- 
panies to  inaugurate  a  trade  war  by  ruinously  underselling  a 
competitor  would  at  once,  owing  to  the  sensitiveness  and  inter- 
related character  of  the  steel  market,  result  in  forcing  the  com- 
pany that  was  thus  ruinously  selling  in  any  particular  market  or 
locality  to  in  the  same  way  ruinously  lower  its  prices  in  every 
other  community."  ^  The  Steel  Corporation  therefore  coiild  not  I 
wage  a  localized  warfare  against  ,il&j»mpetitors/  It  could,  of  ' 
course,  have  reduced  the  prices  of  articles  made  by  certain 
competitors  without  reducing  the  prices  of  the  articles  not  made 
by  these  competitors,  and  in  this  way  have  subjected  these 
particular  competitors  to  cutthroat  competition.  But  this  policy 
was  not  foUowed.  It  could  also  have  cut  prices  to  the  bone 
everywhere,  yet  according  to  the  president  of  the  Cambria  Steel 
Company  this  would  have  amounted  to  an  act  of  suicide.  The 
testimony  is  ample  that  the  competition  of  the  Steel  Corporation, 
though  vigorous,  was  fair,  and  conspicuously  free  from  the 
brutality  of  which  some  other  trusts  have  been  found  guilty.^ 
The  tariff,  iX  is  t"'^,  p1ayi>H  its,part.  The  iron  and  steel  industry  I 
has  been  a  notable  recipient  of  tariff  favors,  and  the  combina-l 
tions  and  trusts  in  this  industry  (notably  the  tin  plate  trust))/ 
have  profited  thereby.  In  fact,  some  of  the  trusts  of  the  late 
nineties  would  perhaps  never  have  been  formed  had  it  not  been  for 
the  tariff  waU,  well-nigh  insurmoim table  to  foreign  competitors. 
But  certainly  the  tariff  was  not  the  mother  of  the  steel  trust  of 
1901;  by  that  time  the  duty  had  become  nominal.  After  the 
removal  of  the  duties  from  iron  and  steel  products  by  the  Sim- 
mons-Underwood bill  of  1913,  the  Steel  Corporation  for  the  most 
part  stood  on  its  own  feet,  unsupported  by  legislative  props,' 
save,  of  course,  such  artificial  support  as  was  involved  in  the 

*  223  Fed.  Rep.  77. 

*  On  this  point,  see  the  testimony  of  competitors  abstracted  in  the  Brief  for 
the  Steel  Corporation  (no.  481),  pp.  122-124. 

'  Not  all  iron  and  steel  products  were  placed  on  the  free  list.  Thus,  the 
duty  on  tubes  and  pipes  was  made  20  per  cent  ad  valorem;  on  tin  plate  1 5  per 
cent;  and  on  structural  shapes  10  per  cent.  Taussig,  Tariff  History  of  the 
United  States  (6th  edition),  p.  441. 




failure  of  the  government  to  prevent  the  Corporation  trom 
acquiring  a  semi-monopoly  of  the  best  iron  ore  deposits,  and  from 
utilizing  its  iron  ore  railroads  to~&e  detriment  of  its  competitors, 
— subjects  to  which  we  now  turn. 

In  view  of  the  fact  that  the  Steel  Corporation  was  losing  its 
hold  on  the  industry,  one  might  have  concluded  that  the  wise 
public  policy  would  have  been  that  of  "watchful  waiting,"  that 
the  steel  trust  in  time  would  disintegrate  by  virtue  of  its  very 
tmwieldiness.  This  may  prove  to  be  the  outcome,  yet  it  must 
be  remembered  that  the  Steel  Corporation  is  unusually  well 
intrenched  in  the  matter  of  the  essential  natural  resources.  The 
important  elements  which  go  into  the  manufacture  of  pig  iron 
(the  foimdation  of  the  steel  manufacture)  are  iron  ore,  coking  j 
coaly  ^hbA  limestone.  Of  these  the  iron  ore  is  the  most  important^  i 
and  the  Steel  Corporation  in  191 1,  when  the  Report  ot^S^ 
Conmiissioner  of  Corporations  was  pubUshed,  held  approxi- 
mately 75  per  cent  of  all  the  commercially  available  iron  ore  of  j 
the  Lake  Superior  district,  the  ore  of  this  district  being  the  basis 
of  the  iron  and  steel  industry  of  the  country.^  (About  85 
per  cent  of  the  country's  output  of  iron  ore  came  at  that 
time  from  the  Lake  Superior  district.)  In  addition,  the  Steel 
Corporation  owned  immense  deposits  of  iron  ore  in  the  South 
and  in  other  sections,  even  including  deposits  in  Cuba.  Mr. 
Gary,  the  chairman  of  the  Steel  Corporation,  admitted  in  his 
testimony  before  the  House  Ways  and  Means  Committee  in 
1908  that  the  Corporation  practically  controlled  the  ultimate  ore 
supply  of  the  country.^ 

The  testimony  of  Mr.  Schwab  before  the  Stanley  Committee 
is  also  significant.  Mr.  Schwab  gave  it  as  his  opinion  that  there 
would  not  be  any  great  development  in  the  iron  and  steel  b\isi- 
ness  by  new  enterprises,  because  of  the  dfficulty  of  securing  a 
sufficiently  large  supply  of  raw  mateHal.  Only  a  concern  possess- 
ing a  large  reserve  of  ore  could  afford  to  make  the  large  invest- 
ment required  to  produce  iron  and  steel  economically,  and  the 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  59. 
'House  Document  no.  1505,  60th  Cong.,  2nd  Sess.,  p.  1752. 


greater  part  of  the  ore  on  this  continent  was  already  owned  or 
leased  by  existing  companies.^ 

The  dominating^gositi.QD  of  fhp  Steel  Corpora tion  in  the  ore 
industry  was  heightened  through  its  ownership  of  iron  ore  rail- 
roads. The  Steel  Corporation  owned  the  Duluth  and  Iron 
Range,  and  the  Duluth,  Missabe  and  Northern,  the  two  most 
important  ore  roads  in  the  Lake  Superior  region.^  The  freight 
rates  charged  by  these  roads  were  very  high,  their  operating 
expenses  were  very  low  (the  operating  ratio  in  1910  was  36.5  per 
cent  for  one  and  below  30  per  cent  for  the  other,  against  an 
average  of  66  per  cent  for  the  whole  coimtry);  and  as  a  result 
these  ore  roads  were  immensely  profitable.'  In  191 1  a  con- 
siderable reduction  in  the  rates  on  iron  ore  was  made  by  the 
carriers,  but,  according  to  the  Commissioner  of  Corporations, 
they  were  still  excessive.^  These  high  rates  not  only  contributed 
greatly  to  the  enormous  earnings  of  the  Steel  Corporation,  but 
they  imposed  a  burden  on  such  of  its  competitors  as  were  obliged 
to  ship  their  ore  over  these  roads, — ^for  none  of  the  competitors 
of  the  Corporation  owned  any  railroads  carrying  iron  ore  from 
the  ore  fields  to  the  Lake  ports.  This  situation  would  seem  to 
have  called  for  the  appUcation  of  the  principle  of  the  commodity 
clause;  the  interests  of  the  public  would  seem  to  have  required 
that  the  Steel  Corporation  divest  itself  of  its  iron  ore  railroads, 
and  thus  remove  the  inducement  which  they  had  to  restrain  the 
independent  operations  by  means  of  excessive  freight  rates  and 
discrimination  in  service. 

After  the  report  of  the  Bureau  of  Corporations  was  published, 
the  Steel  Corporation  cancelled  the  lease  it  held  of  the  valuable 
ore  lands  of  the  Great  Northern  Railway  system.  This  lease  had 
been  made  in  1907  in  order  to  prevent  any  one  else  making  use 
of  these  ore  lands  (the  imusually  high  rate  of  royalty  leads  to 

*  Brief  for  the  United  States  (no.  6214),  part  I,  p.  390. 

'  These  two  roads  handled  about  two-thirds  of  the  total  ore  traffic  of  the 
Lake  Superior  district.  Brief  for  the  United  States  (no.  481),  vol.  I,  pp. 

*  Rqx>rt  of  the  Commissioner  of  Corporadons,  part  I,  pp.  374-375< 

*  Ibid.,  part  III,  p.  506.  A  further  reduction  was  ordered  in  191 5  by  the 
Interstate  C(»nmerce  Commission.    33  I.  C.  C.  Reports  541. 


this  conclusion).^  It  was  provided  that  the  lease  might  be  can- 
celled by  the  Steel  Corporation  on  January  i,  1915,  upon  giving 
two  years'  notice.  On  October  17, 1911,  the  Finance  Committee 
of  the  Steel.  Corporation,  influenced  possibly  by  the  prospect  of 
the  filing  of  a  government  bill — one  was  filed  on  October  26 — 
decided  to  cancel  the  lease  on  January  i,  1915.^  This  action 
opened  up  a  large  supply  of  excellent  ore,  which  might  be  made 
use  of  by  independent  operations. 
^  But  of  more  importance  as  bearing  on  the  ability  of  the  Steel 
Corporation  to  effect  a  monopoly  because  of  a  control  of  the  iron 
ore  is  the  fact  that  the  high  class  Lake  Superior  ores  owned  by 
the  Steel  Corporation  have  become  less  and  less  the  basis  of  the 
steel  industry.  New  fields  were  developed,  and  ores  which  a  few 
years  ago  were  regarded  as  unusable  can  now  be  worked  under 
the  improved  methods  in  vogue.  The  Bethlehem  Steel  Com- 
pany, for  example,  gets  its  iron  ore  from  the  Adirondack  moun- 
tains in  New  York,  from  Sweden,  Chili,  and  Cuba.'  This 
company  and  other  tidewater  concerns  became  entirely  inde- 
pendent of  Lake  Superior  ore,  and  after  the  passage  of  the 
Sinmions-Underwood  bill  were  not  hampered  by  a  duty  on 
foreign  ore.  The  Colorado  Fuel  and  Iron  Company  has  its  ore  in 
Wyoming,  New  Mexico,  and  Utah;  and  is  also  independent  of 
Lake  Superior  ore.  Present  indications,  therefore,  are  that  the 
establishment  of  a  trust  based  on  control  of  the  iron  ore  will 
prove  futile  because  of  new  discoveries  and  improved  methods.* 
And  such  may  in  other  industries  frequently  prove  to  be  the 
case.  But  certainly  this  will  not  be  true  of  all  industries,  and 
therefore  a  definite,  farsighted  policy  with  respect  to  our  natural 
resources  would  seem  to  be  but  the  part  of  wisdom. 

1  For  an  opposing  view,  see  Brief  for  the  Steel  Corporation  (no.  481), 
p.  168. 
'  Brief  for  the  United  States  (no.  6214),  part  11,  pp.  66,  80. 

*  Moreover,  new  deposits  in  the  Lake  Superior  district  were  discovered, 
thus  reducing  the  Corporation's  percentage  of  the  total.  See  Brief  for  the 
Steel  Corporation  (no.  481),  pp.  32-33. 

*  According  to  the  Steel  Corporation  its  ore  holdings  in  the  Lake  Superior 
district  amount  to  less  than  45.6  per  cent  of  the  known  and  devel(^)ed 
ores  of  the  first  quality.   Brief  for  the  Steel  Corporation  (no.  481),  p.  291. 



The  foregoing  considerations,  however,  relate  to  the  future. 
Competition  in  production  continues  quite  active,  and  the 
independents  are  steadily  growing  in  strength  and  importance. 
Yet  this  competition  has  not  made  itself  felt  fully  with  respect 
to  prices;  competition  in  jdces  has  been  materially  restrained  by 
various  means, — spools,  trade  meetings,  and  dinners.*  At  the 
time  of  the  organization  of  the  Steel  Corporation  and  for  several 
years  thereafter  a  nimiber  of  the  constituent  companies  of  the 
Corporation  allotted  trade  and  fixed  prices  by  means  of  pooling 
agreements.^  In  the  year  1904  the  president  of  the  Corporation 
ordered  the  subsidiaries  to  withdraw  from  these  pools.  Never- 
theless shortly  thereafter  representatives  of  the  same  concerns 
that  had  been  parties  to  the  pools  held  trade  meetings,  and  at 
these  meetings  there  were  reached  imderstandings  with  respect 
to  prices  by  means  of  which  the  price  level  was  maintained  as 
effectually  as  imder  the  agreements.'  The  legality  of  these 
meetings  was  questioned,  and  in  1907  they  were  abandoned.^ 
They  were  soon  followed,  however,  by  the  famous  Gary  dinners, 
— another  device  for  substituting  cooperation  for  competition 
as  a  regulator  of  pdces. 

The  first  of  these  dinners  was  held  in  New  York  City  on  No- 
vember 20, 1907.^  The  panic  of  October,  1907,  had  demoralized 
the  steel  trade,  and  the  dinner  was  held  to  discuss  the  proper 
method  of  handling  the  situation.  There  were  present  a  number 
of  manufacturers  of  iron  and  steel,  controlling  among  them  at 
least  90  per  cent  of  the  trade.*  Mr.  Gary,  in  his  testimony  in  the 
government  suit,  explained  the  reason  for  holding  the  dinner. 
"My  purpose  was  ...  to  prevent  the  demoralization  of  busi- 
ness, to  maintain  so  far  as  practicable  the  stability  of  business 

*  Tabks  showing  the  prices  of  iron  and  steel  products  from  1 895-1913  may 
be  found  in  Brief  for  the  United  States  (no.  481),  vol.  II,  pp.  1037-1085. 

'  223  Fed.  Rep.  173.  See  also  Brief  for  the  Steel  Corporation  (no.  481), 
p.  208. 

•  223  Fed.  Rep.  173. 

*Ibid.    According  to  the  Brief  for  the  Steel  Corporation  (no.  481), 
p.  219,  they  were  abandoned  in  October,  1906. 
'  Brief  for  the  United  States  (no.  6214),  part  11,  p.  146. 
•Ibid.,  p.  147. 



and  to  prevent,  if  I  could,  not  by  agreement,  but  by  exhortation, 
the  wide  and  sudden  fluctuation  of  prices  which  would  be  in- 
jurious to  everyone  interested  in  the  business  of  the  iron  and 
steel  manufacturers."  ^ 

This  '*  exhortation  "  to  his  feUow-manufacturers  was  supported 
by  an  elaborate  scheme  for  controlling  prices.  As  a  result  of  the 
dinner  a  general  Advisory  Committee  of  five  members  was 
appointed,  Mr.  Gary  being  chairman.^  This  committee  was 
empowered  to  appoint  sub-conmiittees;  and  it  did  appoint  nine 
such  committees,  one  on  ore  and  pig  iron,  another  on  rails  and 
billets,  and  so  on.  The  Steel  Corporation  was  well  represented 
on  these  committees,  having  two  representatives  on  the  General 
Committee,  and  one  representative  on  each  of  the  nine  sub- 
conunittees.'  The  sub-committees  held  meetings  in  various, 
parts  of  the  country  with  more  or  less  regularity  for  several 
months.  The  president  of  the  Youngstown  Sheet  and  Tube 
Company  was  made  a  member  of  the  sub-committee  on  sheets 
and  plates.  He  testified  in  the  government  suit  that  shortly  after 
the  dinner  of  November  20,  1907,  he  attended  a  meeting  in 
Pittsburg  of  the  manufacturers  of  tin  plate  and  sheet  steel,  at 
which  there  were  present  90  per  cent  of  the  manufacturers  of 
sheet  steel;  that  this  meeting  was  an  outgrowth  of  the  first  Gary 
dinner;  and  that  at  this  meeting  each  manufacturer  was  ques- 
tioned in  regard  to  his  percentage  of  the  business,  and  his  mill 
operations.*  When  the  maintenance  of  the  market  prices  was 
discussed,  what  was  in  mind  was  the  prices  published  by  the 
subsidiaries  of  the  Steel  Corporation.  He  further  testified  that, 
when  he  was  chairman  of  a  sub-committee  meeting,  he  would  ask 
those  present  to  state  whether  they  thought  the  price  was  too 
high,  or  whether  it  was  too  low,  and  that,  when  a  consensus  of 
opinion  had  been  reached,  he  would  call  on  each  one  to  state 
what  policy  he  would  follow  with  respect  to  prices.*  He  made  it 
clear  to  the  members  that  agreements  were  illegal;  and  that  there 
would  be  no  agreement,  no  penalties,  and  no  restriction  of  out- 

*  Brief  for  the  United  States  (no.  6214) »  part  II,  p.  149. 

*  Ibid.,  p.  147.  *  Ibid.,  p.  151. 
» Ibid.,  p   150.                                                                    » Ibid.,  p.  152. 


put.  But  in  response  to  inquiry  from  the  government  examiner 
he  stated  that  he  thought  that  there  was  a  general  understand- 
ing "  that  their  policy  would  be  to  market  their  product  at  the 
then  prevailing  price  until  they  notified  their  competitors  that 
they  wanted  to  change  their  price."  ^  The  witness  also  attended 
the  meetings  of  the  tube  manufacturers  and  of  the  manufacturers 
of  billets  and  sheet  bars,  and  they  were  conducted  on  substan- 
tially the  same  basis.  The  president  of  the  McKeesport  Tin 
Plate  Company  admitted  that  the  effect  of  the  meetings  was  to 
maintain  a  steady  price,  and  that  after  prices  were  announced  he 
would  feel  under  a  moral  obligation  to  sell  at  that  price  until  he 
notified  his  competitors  of  an  intention  to  change.^  Much 
additional  testimony  might  be  cited;  but  the  foUowing  excerpt 
from  the  testimony  of  the  president  of  the  Steel  Corporation 
jfrom  1903  to  December  31, 1910,  will  suffice: 

"Q.  State  whether  or  not  it  was  the  purpose,  in  the  creation 
of  these  sub-committees  to  reach  a  general  understanding  as  to 
prices  of  iron  and  steel  products  and  to  bring  about  the  main- 
tenance of  them. 

The  Witness.  Yes. 

Q.  Were  there  understandings  as  to  what  those  prices  would 

The  Witness.  There  were. 

Q.  Were  the  prices  maintained  or  not  as  a  result  of  those 

The  Witness.  They  were." ' 

It  seems  clear  that  through  the  General  Committee  and  the 
sub-committees  the  manufacturers  of  steel  co5perated,  not  only 
in  maintaining  the  market  price,  but  also  in  making  the  market 
price  identical  with  that  quoted  by  the  subsidiaries  of  the  Steel 

In  February,  1909,  this  policy  of  cooperation  was  temporarily 
abandoned.  Business  had  so  decUned  in  volume  that  the  inde- 
pendents refused  to  abide  by  the  "understandings,"  and  sold  at 

*  Brief  for  the  United  States  (no.  6214),  part  II,  p.  153. 

« Ibid.,  p.  168. 

'  Ibid.,  pp.  168-169/ 


prices  determined  by  themselves.*  The  Steel  Corporation 
attempted  for  a  time  to  maintain  prices  by  itself,  but  soon  aban- 
doned the  attempt,  and  established  an  open  market  in  steel 
products,  except  in  rails.^  In  October,  1909,  the  meetings  of  the 
steel  manufacturers  at  luncheons  and  dinners  were  resimied,  and 
the  result  was  the  restoration  of  the  policy  of  co(^>eration.'  In 
the  fall  of  1910  and  the  early  part  of  191 1  there  were  further 
meetings  of  the  officials  of  the  Steel  Corporation  with  the  other 
steel  manufacturers. 

Fortunately  the  speeches  made  at  the  dinner  of  Jamiary  11, 
191 1,  have  been  preserved,  and  these  clearly  show  the  workings 
of  the  Gary  dinners.    In  his  speech  Mr.  Gary  said  in  part: 

"We  have  something  better  to  guide  and  control  us  in  our 
business  methods  than  a  contract  which  dep>ends  upon  writt^i 
or  verbal  promises  with  a  penalty  attached.  We,  as  men,  as 
gentlemen,  as  friends,  as  neighbors,  having  been  in  close  com- 
munication and  contact  during  the  last  few  years,  have  reached 
a  point  where  we  entertain  for  one  another  respect  and  affec- 
tionate regard.  We  have  reached  a  position  so  high  in  our  lines 
of  activity  that  we  are  bound  to  protect  one  another;  and  when  a 
man  reaches  a  position  where  his  honor  is  at  stake,  where  even 
more  than  life  itself  is  concerned,  where  he  can  not  act  or  fail  to 
act  except  with  a  distinct  and  clear  understanding  that  his  honor 
is  involved,  then  he  has  reached  a  position  that  is  more  binding 
on  him  than  any  written  or  verbal  contract.*'  * 

In  his  speech  Mr.  Gary  further  said  that  in  his  opinion  it 
would  be  a  mistake  to  reduce  prices  at  that  time.  At  this  same 
dinner  a  representative  of  Jones  and  Laughlin  said  in  part,  "I 
hope  it  will  be  the  consensus  of  opinion  here  to-night  that  we  will 
maintain  the  present  prices."  ^  The  president  of  the  Ashland 
Steel  Company  said  that  so  far  as  his  company  was  concerned, 
"we  are  ready  and  willing  to  still  co(^)erate  to  do  what  we  can  to 

*  223  Fed.  Rep.  175. 

'  Brief  for  the  United  States  (no.  6214),  part  II,  p.  200. 
'  Ibid.,  p.  207. 

*  Ibid.,  (no.  481),  vol.  II,  pp.  989-990. 
» Ibid.,  p.  993. 


maintain  prices."  ^  Mr.  Gary,  during  the  course  of  the  dinner, 
called  on  practically  all  of  the  leading  steel  manufacturers,  and 
each,  almost  without  exception,  expressed  himself  as  in  favor  of 
maintaining  the  existing  prices,  or  as  ready  to  support  the 
co<^)erative  movement  with  respect  to  prices. 

Whether  as  a  result  of  the  investigation  of  the  Stanley  Com- 
mittee of  the  House  of  Representatives  or  in  anticipation  of  the 
government  suit,  the  Gary  dinners  came  to  an  end  in  191 1,  and 
judging  from  the  movement  of  prices,  the  co5p>erative  arrange- 
ment was  given  up.  With  respect  to  these  dinners  the  Stanley 
Conmiittee  said: 

^' We  think  the  conclusion  is  irresistible  that  the  Gary  dinners 
were  instituted  as  a  means  of  conve3dng  to  the  entire  iron  and 
steel  industry  information  as  to  what  the  attitude  of  the  United 
States  Steel  Corporation  was  upon  the  questions  of  output  and 
prices  and  of  impressing  upon  all  engaged  in  the  industry  that 
it  was  the  part  of  wisdom  and  prudence  to  govern,  themselves 
accordingly.  We  further  believe  that  by  this  means  prices  were 
maintained,  output  restricted,  competition  stifled,  and  trade 
restrained,  just  as  certainly,  just  as  effectively,  and  just  as 
unlawfuUy  as  had  been  done  under  the  discarded  pooling  agree- 
ments of  former  years."  * 

Perhaps  the  best  evidence  of  the  success  of  the  policy  of  \ 
co5peration,  promoted  by  pools  and  dinners,  is  the  coiurse  of  the 
price  of  Bessemer  steel  rails.   From  1867  to  1900  (the  year  before  i 
the  formaticm  of  the  steel  trust)  the  price  of  steel  rails  varied  f 
every  year;  in  no  two  years  during  all  this  period  did  it  continue 
the  same.'  Prior  to  the  formation  of  the  Steel  Corporation  there 
was  severe  competition  in  steel  rails,  and  the  price  fell  from  $28 
per  ton  in  1896  to  $17  per  ton  in  1898.    A  combination  then 
raised  the  price  for  a  time  to  $35,  but  early  in  1901  it  went  as  low 
as  $26.    In  April,  1901,  the  Steel  Corporation  began  operations; 
in  May  the  price  of  rails  was  fixed  at  $28  per  ton;  and  the  price 
remained  at  that  figure  up  to  the  date  of  the  government  suit, 

1  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  998. 

*  Stanley  Committee  Rqx>rt,  p.  1 26. 

*  Brief  for  the  United  States  (no.  6214),  part  I,  p.  13. 


having  been  effectively  controlled  by  the  Steel  Corporation  in 
cooperation  with  the  independent  sleel  manufacturers.  This 
price  of  $28,  it  may  be  noted,  was  some  $10  per  ton  higher  than 
the  prices  that  prevailed  during  1897-1898,  when  there  was 
competition  between  the  Carnegie  Steel  Company  and  the 
Illinois  Steel  Company;  though  the  prices  of  1897-1898  )delded 
these  companies  a  substantial  profit.^  The  ability  of  the  Steel 
Corporation  to  maintain  the  price  of  steel  rails  at  an  arbitrary 
figure,  despite  marked  fluctuations  in  demand  ^  and  in  manufac- 
turing costs,  abundantly  testifies  to  the  tremendous  power  of  this 
mammoth  organization. 

*  Brief  for  the  United  States  (no.  481),  vol.  I,  p.  169. 

'  In  1901,  99.9  per  cent  of  the  rails  sold  were  Bessemer  rails.  Since  than 
date  Bessemer  rails  have  been  largely  superseded  by  open-hearth  rails.  In 
191 2  only  one-third  of  the  rails  sold  were  Bessemer  rails.  Brief  for  the 
Steel  Corporation  (no.  481),  p.  215. 



The  International  Harvester  Company — the  harvester  trust — 
was  erganizedjn  New  Jejypy  nn  Angnst  12, 1902.  It  represented 
a  consolidation  of  the  five  leading  manufacturer^  of  harvesting 
machines, — the  McCormick  Harvesting  Machine  Company 
(with  a  factory  at  Chicago),  the  Deering  Harvester  Company 
(with  a  factory  at  Chicago),  the  Warder,  Bushnell  and  Glessner 
Company  (with  a  factory  at  Springfield,  Ohio),  the  Piano  Manu- 
facturing Company  with  a  factory  at  Piano,  Illinois  (near 
Chicago),  and  the  Milwaukee  Harvester  Company  (with  a 
factory  at  Milwaukee).*  The  five  plants  of  these  companies, 
according  to  an  official  statement,  were  the  largest  and  most 
complete  of  their  kind  in  the  world.^  Among  them  they  pro- 
duced approximately  85  per  cent  of  the  total  output  of  harvesting 
machines  in  the  United  States.*  Their  control  of  the  harvester 
trade  in  the  territory  adjacent  to  them  (the  great  grain  growing 
states  of  the  country)  was  even  greater  than  85  per  cent,  since  ^^ ' 

the  leading  competitors  of  the  trust  were  located  in  New  York  \ 

>  On  the  International  Harvester  Company  see:  Report  of  the  Commis- 
sbner  of  Corporations  on  the  International  Harvester  Company,  March  3, 
1913;  Report  of  the  Federal  Trade  Commission  on  the  Causes  of  High  Prices 
of  Farm  Implements,  May  4,  1920;  Brief  for  the  United  States  in  Interna- 
tional Harvester  Company  v.  United  States  (no.  757);  Brief  for  the 
International  Harvester  Company  (no.  757);  Brief  for  the  United  States  in 
International  Harvester  Company  v.  United  States  (no.  56);  Brief  for  the  In- 
ternational Harvester  Company  (no.  56);  Appendix  to  defendant's  brief  in 
United  States  v.  International  Harvester  Company  (no.  624);  237  Missouri 
Reports  369-424;  234  U.  S.  199-215;  214  Fed.  Rep.  987-1012. 

'  Report  of  the  Conamissioner  of  Corporations  on  the  International  Har- 
vester Company,  p.  67.  Hereafter  referred  to  as  Report  on  the  International 
Harvester  Company. 

»  Chnm.,  75,  p.  345  (August  16,  1902). 

*  Report  on  the  International  Harvester  Company,  p.  67. 



State,  with  a  market  largely  confined  to  the  North  Atlantic 
states  and  to  foreign  countries. 

Prior  to  the  organization  of  the  International  Harvester 
Company  competitive  conditions  had  prevailed  in  the  manufac- 
ture of  harvesting  machines.  Notable  improvements  in  the  ^ 
manufacturing  processes,  combined  with  a  steady  increase  in  the 
size  of  the  factories,  had  led  to  marked  economies  in  production; 
and  these  in  turn,  owing  to  competition,  had  led  to  considerable 
price  reductions.  At  various  periods  during  the  eightieS  the 
manufacturers  had  endeavored,  through  price  agreements,  to 
hold  competition  in  check,  but  without  marked  success.  In 
1887  and  again  in  1890  attempts  had  been  made  to  form  a  com- 
bination of  the  leading  manufacturers,  and  in  1890  a  company 
had  actually  been  chartered  for  that  purpose;  but  in  both  in- 
stances the  plan  had  fallen  through.  From  1890  until  the 
organization  of  the  International  Harvester  Company  in  1903 
apparently  no  attempt  had  been  made  to  effect  a  consolidation. 
Competition,  generally  speaking,  had  been  quite  active.  In  fact 
the  organizers  of  the  International  Harvester  Company  subse- 
quently claimed  that  it  was  the  severity  of  competition  that 
made  a  combination  necessary.  The  president  of  the  Inter- 
national Harvester  Company  characterized  the  competition  as 
fierce;  list  prices  could  not  be  maintained.*  Mr.  Glessner,  of 
Warder,  Bushnell  and  Glessner,  expressed  the  opinion  that  "in 
the  harvester  business  there  was  a  competition  never  known  in 
any  other  business  in  the  world."  *  Mr.  Jones,  of  the  Piano 
Manufacturing  Company,  testified  that  competition  was  so 
severe  that  neither  the  manufacturers  nor  the  dealers  were 
making  anything.'  Moreover,  the  Commissioner  ^ho  heard 
the  testimony  in  a  suit  in  a  Missouri  court  described  the  compe- 
tition as  "active,  persistent,  strenuous,  and  fierce."  * 

TTie  claim  that  the  formation  of  a  harvester  trust  was  neces- 
sary  to  avoid  ruinous  competition  was  analyzed  by  the  Bureau  of  • 

'  Report  on  the  International  Harvester  Company,  p.  59. 

*  Ibid.,  p.  60. 
•Ibid.,  p.  61. 

*  237  Missouri  Reports  3S4. 


Corporations  in  its  investigation  of  the  International  Harvester 
Company.  "There  is  no  doubt"  said  the  Bureau,  "that  the 
principal  motive  for  the  formation  of  the  International  Harvester 
Co.  was  to  eliminate  competition  and  to  secure  a  dominant  posi- 
tion in  the  trade."  ^  Tliough  the  desire  to  eliminate  competition 
kd  to  the  organization  of  the  trust,  yet  competition  was  not  so 
severe,  in  the  opinion  of  the  Bureau,  as  to  make  the  formation  of 
a  trust  necessary.  Most  of  the  larger  companies,  it  reported,  had 
been  making  considerable  profits,  and  sometimes  very  large 
profits.^  Specific  information  as  to  the  profits  of  the  harvester 
companies  prior  to  1902  was  difficult  to  obtain,  and  such  data  as 
was  gathered  by  the  Bureau  related  only  to  the  five  companies 
which  united  to  form  the  trust.  But  these  five  companies,  as  has 
been  pointed  out,  included  the  five  leading  manufacturers,  and 
produced  over  four-fifths  of  the  total  output  Such  data  as  was 
available  showed  that  in  general  the  profits  of  the  large  com- 
panies had  been  quite  high  during  the  five  years  preceding  the 
oilganization  of  the  International  Harvester  Company.  The 
Piano  Manufacturing  Company,  it  is  true,  had  sustained  a 
deficit  in  both  1900  and  1901,  and  the  profits  of  the  Milwaukee 
Company  had  been  low  in  1901;  but  the  profits  of  the  McCor- 
mick  and  Deering  companies  had  been  high  in  every  one  of  the 
five  years,  and  the  profits  of  the  Milwaukee  Company  and  of 
Warder,  Bushnell  and  Glessner  (the  Champion  Company)  had 
generally  been  high.'  It  is  significant  that  in  three  of  the  five 
years  for  which  the  profits  were  shown  the  aggregate  aimual 
profit  oi  the'  five  competing  companies  was  greater  than  the 
rqx)rted  profit  of  the  trust  during  any  one  of  the  first  six  years 
of  its  existence,  and  this  notwithstanding  the  fact  Jhat  the 
period  after  1902  was  one  of  great  prosperity.^  It  is  also  signi- 
ficant that  a  committee  appointed  to  consider  the  taking  over  of 

'  Report  on  the  International  Harvester  Company^  p.  70. 

>  Ibid.,  p.  63. 

» IWd.,  p.  63. 

^Ibid.,  p.  64.  A  possible  explanation  of  the  low  "reported"  profit  of 
the  trust  is  the  large  amount  of  earnings  put  back  into  the  business,  es- 
pedally  in  tew  lines  and  in  plants  abroad. 


the  business  of  the  five  companies  which  combined  to  form  the 
trust  reported  that  each  of  these  companies  had  for  several  years 
enjoyed  a  "prosperous,  profitable  and  growing  business."  ^  In 
addition,  the  McCormick  and  Deering  companies,  especially, 
had  been  increasing  their  business  rapidly  prior  to  the  merger.* 
The  Bureau  by  way  of  conclusion  said:  "This  large  increase  in 
the  volume  of  business  taken  in  connection  with  the  compara- 
tively high  rates  of  profits  earned  on  the  capital  invested  is  strong 
evidence  of  the  fact  that  the  companies  which  originally  formed 
the  International  Harvester  Co.  were  generally  not  suffering 
from  excessive  competition.  The  combination,  therefore,  can 
not  be  justified  on  the  principle  of  self-preservation,'*  ^ 

TTie  argument  most  frequently  advanced  in  favor  ^^  trw^f^  is 
that  thev  make  possible  economies,  not  otherwise  realizable. 
But-^  the  Bureau  of  Corporations  claims — the  expectation 
of  reducing  costs  was  only  a  secondary  motive  in  the  oiganiza- 
tion  of  the  harvester  trust.*  This  matter  will  be  considered  in 
more  detail  later  on  in  this  chapter,  but  at  this  point  it  may  be 
stated  that  the  International  Company  did  effect  a  high  jegree 
of  integration.  Through  its  constituent  companies  it  acquired 
coal  lands,  iron  ore  properties,  iron  and  steel  plants,  timber  lands, 
and  saw  mills.  By  supplying  itself  with  its  chief  raw  materials  at 
cost,  the  company  not  only  had  an  assured  supply,  but  kept  for 
itself  the  profits  that  otherwise  would  have  gone  to  other  con- 
cerns. (This  assumes  that  the  company  could  produce  its  steel, 
for  example,  cheaper  than  it  could  buy  it  from  the  steel  trust,  an 
assumption  apparently  justified  in  view  of  the  fact  that  the 
company  continued  to  make  its  own  steel.)  With  the  manu- 
facturing properties  also  went  binder  twine  mills  and  several 
industrial   railroads.     The   McCormick   concern   owned   the 

*  Brief  for  the  United  States  (no.  56),  pp.  18-19. 

'  Between  1899  and  1902  the  assets  of  the  McCormick  Company  increased 
from  $12  million  to  $50  million,  all  from  earnings.  Its  sales  of  the  principal 
harvesting  machines  increased  from  371,312  in  1900  to  503,517  in  1902;  and 
the  Deering  Company's  sales  increased  during  the  same  period  from  281,574 
to  370,107.    Brief  for  the  United  States  (no.  56),  p.  8. 

*  Report  on  the  International  Harvester  Company,  p.  66. 

*  Ibid.,  p.  70. 


Illinois  Northern  Railway,  a  short  line  connecting  the  McCor- 
mick  plant  and  other  industrial  enterprises  with  several  railroads 
entering  Chicago;  and  the  Piano  concern  owned  the  Chicago, 
West  Pullman  and  Southern  Railway. 

Another  motive  in  the  organization  of  the  IiAemational 
Harvester  Company  was  the  prn^ntmn  nf  thp  export  trade  in 
agricultural  implements.  It  was  claimed  on  behalf  of  the  com- 
pany that  none  of  the  companies  then  in  the  business  had  suffi- 
cient capital  and  credit  to  develop  the  foreign  trade  adequately, 
or  had  sufficient  trained  harvester  men  to  create  an  organization  \ 
that  would  effectively  cover  the  foreign  field.  ^  The  foreign  trade 
argument,  it  may  be  noted,  is  often  cited  as  a  justification  for  the 
trust.  Just  what  importance  this  factor  played  here  is  hard 
to  say.  The  testimony  of  the  president  of  the  International 
Harvester  Company  shows  that  the  five  companies  that  entered 
the  trust  had  already  built  up  a  very  large  export  business;  and 
this  was  true,  also,  of  the  four  independent  harvester  companies 
in  New  York  state.  ^  As  a  matter  of  fact,  American  harvesting 
machines  were  then  being  marketed  all  over  the  world.  After 
the  International  Harvester  Company  was  organized,  the  foreign 
trade,  it  is  true,  was  much  extended,  yet  whether  this  resulted 
from  the  organization  of  the  trust  or  whether  it  would  have  come 
about  anyhow  is  something  on  which  it  is  difficult  to  pass  judg- 
ment— ^is,  in  the  words  of  Judge  Smith,  "a  mere  matter  of 

Still  another  motive  for  the  formation  of  trusts  is  the  profit  j 
obtained  by  the  promoters.^    The  bankers  who  promoted  the  "^ 

trvesier  trust  received  $3,148,197  in  stock  for  the  Milwaukee 
Harvester  Company, — one  of  the  five  original  companies.  This 
sum  seems  to  have  represented  the  value  of  the  property  con- 
veyed. In  addition  they  received  $2,957,143  in  stock  for  their 
services  as  promoters,  this  sum  being  over  and  above  all  expenses 

>  Brief  for  the  Tntemational  Harvester  Company  (no.  56),  pp.  55-56. 
See  also  p.  525. 

*  Report  on  the  International  Harvester  Company,  pp.  71-72. 

*  214  Fed.  Rep.  993. 

*  Cf.  pp.  293  acq. 


incurred  in  the  formation  of  the  Harvester  Company.  This 
payment  of  abnost  $3,000,000,  in  the  opinion  of  the  Bureau  of 
Corporations,  was  excessive.  To  the  extent  that  it  was  excessive 
it  served  as  an  inducement  for  the  promoters  to  form  the  trust. 
But  undoubtedly  it  would  be  a  mistake  to  attach  much  impor- 
tance to  this  factor  in  endeavoring  to  explain  the  organization 
of  the  International  Harvester  Company. 

The  formation  of  the  Interiiational  Harvester  tompany  was 
noteworthy  for  the  absence  of  any  important  overcapitalization. 
At  its  oiganization  the  company  had  a  capital  of  $120,000,000, 
all  conmion  stock  (no  bonds).  Without  going  into  the  financial 
details  of  the  promotion,  half  of  the  stock  ($60,000,000)  was 
issued  for  cash,  which  was  to  constitute  working  capital;  and  the 
other  half  was  issued  for  the  properties  acquired  and  for  bankers' 
conmiissions.^  Whether  there  was  any  overcapitalization 
depended  therefore  on  whether  the  properties  acquired  were 
worth  $60,000,000.  The  organizers  appraised  the  value  of  the 
property  at  approximately  $67,000,000,  not  counting  good  will, 
and  the  company  claimed,  therefore,  that  it  commenced  opera- 
tions with  a  surplus  of  $7,000,000.*  The  Bureau,  however, 
regarded  the  appraisal  value  as  excessive.  Though  it  found  it 
difficult  to  arrive  at  an  accurate  valuation  because  of  the  fact 
that  the  records  of  the  company  were  not  well  kept,and  because 
in  some  instances  the  company  denied  access  to  the  records, 
nevertheless  the  Bureau  felt  that  a  fair  valuation  would  be  about 
$49,000,000,  not  including  the  good  will.*  In  the  opinion  of  the 
Bureau,  the  diflFerence  between  $60,000,000  and  $49,000,000 
must  be  "egarded  as  having  been  issued  for  good  will  and  promo- 
tion services.  But  there  can  be  no  doubt  that  a  substantial 
amount  of  good  will  was  brought  into  the  merger,  quite  apart 
from  any  so-called  merger  value.  It  follows,  therefore,  that  if 
the  International  Harvester  Company  was  overcapitalized,  it 

^  Report  on  the  International  Harvester  Company,  p.  86. 

•  Ibid.,  p.  95.  See  also  Report  of  the  International  Harvester  Company 
for  1907,  in  Chron.,  86,  pp.  1471-1474. 

'  Report  on  the  International  Harvester  Company,  pp.  94,  96, 
1 25. 


was  only  to  a  slight  degree.  This  variation  from  the  customary 
practice  is  perhaps  to  be  explained  partly  by  the  stock  market 
conditions  in  1902,  and  partly  by  the  fact  that  the  constituent 
companies  were  for  the  most  part  close  corporations.  The 
McCormick  family  alone  received  42.6  per  cent  of  the  stock  of 
the  International  Company,  and  the  Deering  family  received 
34.4  per  cent  These  two  groups  between  them,  therefore,  re- 
ceived 77  per  cent  of  the  total  capitalization,  and  were  thus  in 
full  control. 

After  its  organization  the  International  Harvester  Company 
acquired  a  number  of  competing  enterprises.  In  1903  it  pur- 
chased D.  M.  Osborne  and  Company,  the  leading  independent 
concern.^  This  company  had  its  plant  at  Auburn,  New  York, 
and  was  thus  in  a  favorable  position  to  compete  for  the  export 
trade.  Its  chief  product  was  harvesting  machines,  but  it  also 
manufactured  tillage  implements  and  binder  twine.  As  part  of 
the  terms  of  the  sale  the  two  leading  active  stockholders  of  the 
Osborne  concern  agreed  that  for  a  period  of  ten  years  they  would 
not  engage  in  the  business  in  the  United  States  (except  in  Ari- 
zona and  New  Mexico),  Europe  (except  Belgium  and  Holland), 
South  America,  or  Australia,  thus  evidencing  the  monopolistic 
purpose  of  the  International  Harvester  Company.  During 
1903  and  1904  the  purchase  of  the  Osborne  concern  was  kept 
secret.  This  was  at  the  request  of  the  Osborne  Company,  in 
order  to  enable  it  to  collect  its  bills  receivable.^  During  this 
period  an  official  of  the  Osborne  Company  made  affidavits,  as 
required  by  the  anti-trust  laws  of  the  state  of  Missouri,  that  the 
company  was  not  a  party  to  any  agreement  or  combination  to 
fix  prices  or  output,  and  that  it  had  not  entered  into  any  arrange- 
ment which  in  any  way  tended  to  interfere  with  full  and  free 
competition  in  the  manufacture  and  sale  of  its  products.^ 

During  1903-1904  some  of  the  stockholders  of  the  Inter- 
national Harvester  Company  acquired  the  Minnie  Harvester 
Company,  the  Aultmann-Miller  Company,  and  the  Keystone 

'  Report  on  the  International  Harvester  Company,  p.  137. 

•  Brief  for  the  International  Harvester  Company  (no.  757),  p.  38. 

'  Rqx>rt  on  the  International  Harvester  Company,  p.  296. 


Company.  These  three  companies  were  competitors  of  the 
International  Company,  and  were  acquired — the  Bureau  be- 
lieved— ^largely,  if  not  almost  wholly,  for  the  purpose  of  elimi- 
nating their  competition.^  In  each  case  the  control  was  kept 
secret,  and  the  companies  passed  as  independents.  In  1905  these 
three  companies  (and  the  Osborne  Company)  were  transferred  to 
the  International  Company,  apparently  as  the  result  of  a  change 
of  policy  on  the  part  of  the  management.  Thereupon  the  pro- 
duction of  binders  at  these  three  plants  was  discontinued,  and 
the  plants  were  used  to  manufacture  binder  twine,  auto  buggies, 

1  trucks,  and  other  lines. 

Y>  The  International  Harvester  Company  also  endeavored  to 
extend  its  control  to  other  lines  of  farm  machinery, — lines  not 
competing  with  harvesting  machines.  In  1904  some  of  the  stock- 
holders of  the  company  secured  control  of  the  Weber  Wagon 
Company;  and  in  1905  the  property  of  this  company  was  trans- 
ferred to  the  International.  The  Weber  concern  occupied  a  very 
important  position  in  the  farm  wagon  trade;  and  through  it  and 
the  later  extension  of  its  business  the  International  Harvester 
Company  became  one  of  the  leaders  in  this  line. 
^  In  1906  the  International  Company  acquired  a  manure 
spreader  plant,  and  subsequently  it  attained  a  commanding 
position  in  this  branch  also.  The  company,  in  addition,  became 
the  selling  agent  for  a  niunber  of  concerns  making  plows,  seeding 
machines,  etc.,  and  in  this  way  broadened  its  interest  in  the 
farm  machinery  trade. 

The  company  also  developed  the  new  lines  at  its  old  plants. 
Thus,  at  the  Milwaukee  plant  the  manufacture  of  gasoline 
engines,  cream  separators,  and  tractors  was  begim  in  1904,  1905, 
and  1909,  resp)ectively.  The  brands  formerly  made  at  the  Mfl- 
waukee  plant  were  thereafter  made  at  the  McCormick  works. 
Likewise  the  Piano  plant  ceased  manufacturing  harvesters — the 
brands  formerly  turned  out  there  were  thenceforth  manufac- 
tured at  the  Deering  plant — and  in  1905  and  1906  commenced 
the  manufacture  of  manure  spreaders  and  wagons.  The  Cham- 
pion plant  continued  to  make  harvesting  machines,  but  it  added 
*  Rq>ort  on  the  International  Harvester  Company,  p.  141. 

THE  International  HAkvEstER  company       239 

hay  tools  in  1903,  seeders  in  1906,  and  manure  spreaders  in  1908. 
In  1910  a  large  tractor  works  was  opened  in  Chicago.  This 
was  the  only  important  new  plant  for  the  manufacture  of  agri- 
cultural implements  constructed  by  the  company  in  the  United 

From  the  sales  end  this  extension  into  new  lines  was  quite 
advantageous.  The  sales  of  harvesting  machines  in  any  given 
territory  are  generally  made  within  a  comparatively  short  period 
in  each  year.  The  sales  force  in  the  past  had  been  employed  for 
only  a  few  months  during  each  year,  and  it  had  then  been  dis- 
banded.^ The  extension  of  the  business  to  include  agricultural 
implements  used  at  different  seasons  of  the  year  made  it  possible 
to  sustain  an  all-year-round  selling  organization,  thus  contribut- 
ing decidedly  to  its  efliciency. 

The  Harvester  Company  also  strengthened  its  position  in  fhe 
export  trade.  This  it  did  by  the  purchase  of  foreign  companies, 
or  by  the  construction  of  plants  abroad.  For  example,  in  1903 
the  International  Harvester  Company  of  Canada  was  incor- 
porated. It  built  a  large  harvester  factory  at  Hamilton,  On- 
tario, and  subsequently  added  tillage  implements,  seeders,  and 
manure  spreaders.  Other  smaller  plants  were  likewise  acquired 
in  Canada.  The  Harvester  Company  also  built  or  acquired 
plants  in  France,  Germany,  Russia,  and  Sweden,  and  organized 
marketing  companies  in  a  number  of  other  countries.  The 
establishment  of  these  factories  abroad  was  chiefly  the  result 
of  the  protective  poUcy  of  these  foreign  countries.  Generally 
speaking,  it  proved  more  profitable  for  the  International  Har- 
vester Company  to  manufacture  the  machines  abroad  (thus 
saving  the  tariff  duty)  than  to  make  them  in  this  country  and 
export  them.  Obviously  there  was  a  great  saving  in  transporta- 
tion charges  as  well,  though  this  saving  was  offset  in  part,  at 
least,  by  the  greater  cost  of  production  in  the  foreign  plants,  the 
industry  being  one  particularly  suitable  to  this  coimtry,  and  one 
in  which  the  economies  of  large-scale  production  are  great. 

In  1913  there  was  made  an  important  reorganization  directly 
affecting  the  newly  acquired  lines  and  the  foreign  business.  On 
"  Brief  for  the  International  Harvester  Company  (no.  757),  p.  6i. 


account  of  the  suit  brought  by  the  government  to  effect  the 
dissolution  of  the  International  Harvester  Company  on  the 
ground  that  it  was  a  combination  in  restraint  of  trade,  the  board 
of  directors  organized  in  the  state  of  New  Jersey  on  January  27 
a  new  company,  called  the  International  Harvester  Corpora- 
tion.* To  the  Corporation  were  transferred  all  the  domestic 
plants  exclusively  engaged  in  the  manufacture  of  the  "new 
lines,"  all  the  foreign  plants,  and  all  the  transportation  com- 
panies.^ The  capitalization  of  the  Corporation  consisted  of 
$30,000,000  preferred  stock  and  $40,000,000  common.  This,  it 
may  be  noted,  represented  just  half  the  total  of  each  class  of 
stock  of  the  International  Harvester  Company.  The  Company, 
starting  out  with  a  capital  of  $120,000,000,  all  common,  had  in 
1907  converted  half  of  the  common  into  preferred.  In  1910  it 
had  declared  a  33  1/3  per  cent  common  stock  dividend,  thus 
increasing  its  total  capitaUzation  to  $140,000,000.  Because  of 
the  organization  of  the  Corporation  with  a  capital  of  $70,000,000, 
the  Company  reduced  its  capital  from  $140,000,000  to  $70,000,- 
000,  and  changed  its  name  to  the  International  Harvester  Com- 
i  pany  of  New  Jersey,^ 

This  plan  of  dissolution  was  approved  by  the  stockholders  in 
February,  1913.  Of  this  plan  the  Bureau  said:  "If  intended  as  a 
part  of  a  proposed  plan  of  disintegration,  the  Bureau  regards 
this  method  of  division  as  very  unsatisfactory.  Obviously,  it 
does  not  touch  the  most  essential  feature  of  the  company  as  a 
combination  of  competitors,  namely,  the  consolidation  of  the 
chief  harvesting-machine  plants  of  the  country,  and  especially  of 
the  McCormick,  Deering,  Champion,  and  Osborne  works."  * 
In  this  connection  mention  may  be  made  of  another  company, 
which  is  liable  to  be  confused  with  one  or  the  other  of  the 
foregoing  companies.   This  is  the  International  Harvester  Com- 

*  Chron.,  96,  p.  365  (February  i,  1913). 

*  Report  on  the  International  Harvester  Company,  pp.  169,  174. 

■  Holders  of  the  $70,000,000  cancelled  stock  were  entitled  to  receive  cash 
($100  per  share)  or  shares  in  the  corre^wnding  class  of  security  of  the  Corpo- 

*  Report  on  the  International  Harvester  Company,  p.  178. 


pany  of  America,  In  the  original  merger  the  International 
Harvester  Company  did  not  acquire  the  stocks  of  the  companies 
combined;  it  merely  acquired  their  properties.  But  a  few  weeks 
later  it  did  acquire  the  capital  stock  of  the  Milwaukee  Har- 
vester Company,  and  with  it  its  charter.^  The  stock  of 
this  company,  as  distinguished  from  its  factory  (which  had 
already  been  acquired),  was  secured  in  order  that  the  company 
might  be  employed  as  a  selling  agency,  and  thus  reUeve  the 
International  Harvester  Company  of  the  restrictions  that  it  was 
likely  to  meet  in  the  conduct  of  business  in  other  states.  Thus, 
the  laws  of  some  states  excluded  corporations  with  a  capital  as 
large  as  that  of  the  International  Harvester  Company,  and  the 
laws  of  others,  while  admitting  foreign  corporations  (that  is, 
corporations  chartered  outside  the  state),  subjected  them  to 
heavy  taxation,  and  sometimes,  if  they  were  trusts,  refused  to 
license  them.  ^The  International  Harvester  Company,  being  a 
new  corporation,  would  doubtless  have  experienced  some  delay 
in  securing  Ucenses  in  the  several  states;  it  might  have  been 
denied  a  license  in  others  on  the  ground  that  it  was  a  trust; 
and  it  would  probably  have  been  subject  to  heavy  taxation, 
since  the  laws  of  some  states  made  the  amount  of  capitalization 
the  basis  of  taxation.  The  Milwaukee  Harvester  Company, 
however,  already  had  licenses  to  do  business  in  the  several  states, 
and  it  was  thus  well  suited  to  serve  as  a  selling  agency.  The 
International  Harvester  Company,  therefore,  transferred  to  the 
Milwaukee  Harvester  Company  (the  name  of  yrhich  was  changed 
in  September,  1902,  to  the  International  Harvester  Company  of 
America)  practically  all  of  its  warehouses  and  other  faciUties  for 
the  sale  of  its  machines,  and  constituted  it  its  sole  selling  agent.^ 
The  International  Harvester  Company  (of  New  Jersey),  through 
the  ownership  of  all  of  the  capital  stock  of  the  International 
Harvester  Company  of  America,  of  course  controlled  its  seUing 
agent  completely.* 

'  Report  on  the  International  Harvester  Company,  p.  87. 
*Ibid.,  p.  90,  and  237  Missouri  Reports  383. 

'  The  use  of  the  International  Harvester  Company  of  America  as  a  selling 
agency  was  held  by  the  Supreme  Court  of  Missoiui  to  be  in  violation  of  the 


The  International  Harvester  Company  at  its  organization 
produced,  as  we  have  seen,  about  8$  per  cent  of  the  country's 
output  of  harvesting  machines.  This  figure  is  not  exact,  since 
the  number  of  each  type  of  harvesting  machines  produced  by  the 
independent  concerns  is  not  known.  However,  reasonably  com- 
plete data  for  grain  binders,  mowers,  and  rakes — ^three  of  the 
most  important  machines — are  available,  and  especially  for  the 
first  two.  We  may  therefore  turn  to  an  examination  of  the 
position  of  the  International  Harvester  Company  in  these  lead- 
ing branches  of  the  industry. 

TTie  number  of  each  of  these  machines  sold  in  1902  by  the 
trust  and  by  the  independents,  with  percentages,  is  shown  in  the 
following  table.^ 

IfUemational  Harvester  Co' 

Independent  concerns 

No.  sold » 

Per  cent 

No.  sold  » 


Grain  binders 




81,376  * 




The  trust,  it  appears,  sold  over  ninety  per  cent  of  the  binders, 
over  eighty  per  cent  of  the  mowers,  and  nearly  seventy  per  cent 
of  the  rakes.  These  figures,  it  should  be  noted,  are  for  the  total 
sales  of  each  group,  including  the  export  trade.  Inasmuch  as  the 
independent  binder  concerns  had  a  relatively  large  export  trade, 
the  International  Harvester  Company  undoubtedly  controlled  a 
larger  percentage  of  the  domestic  market  than  the  figure  for 

state  law  forbidding  a  company  with  a  capital  as  large  as  that  of  the  Interna- 
tional Harvester  Company  to  obtain  a  license,  and  a  fine  and  ouster  (sus- 
pended conditionaUy),  was  ordered.  237  Missouri  Reports  374,  398.  This 
decree  was  affirmed  by  the  Supreme  Court  of  the  United  States.  234 
U.  S.  215. 

^  Report  on  the  International  Harvester  Company,  p.  92. 

*  Number  produced  in  the  case  of  the  Milwaukee  Harvester  Company. 

•  Number  pnxluced  in  the  case  of  the  Osborne  Company. 
^  Number  for  independents  partly  estimated. 



total  sales  (90.9  per  cent)  would  indicate.  The  same  is  true  to  a 
lesser  degree  of  mowers  also. 

Similar  statistics  are  not  available  for  reapers  or  com  bind- 
ers— other  important  types  of  harvesting  machines — ^yet  in  all 
probability  the  proportion  of  the  business  in  these  lines  con- 
trolled by  the  International  Harvester  Company  was  nearly  as 
great  as  the  figure  shown  above  for  grain  binders. 

Always  pertinent  is  an  examination  of  the  ability  of  a  trust, 
once  formed,  to  retain  its  monopolistic  position.  Sufficient  data 
are  available  to  indicate  with  substantial  accuracy  the  relative 
position  of  the  International  Company  and  the  independents 
in  the  leading  lines  from  1902  to  191 1  and  in  1918.  The 
situation  with  respect  to  grain  binders  is  shown  in  the  table 

PRODUCTION  OF  Grain  Binders  in  the  Unttbd  States,  1902-1911,  1918 

IntemcUional  Harvester  Co. 

Independents  * 


Per  cent 


Per  cent 












180,401  * 










65  3 







10. 0 







*  Report  on  the  International  Harvester  Company,  p.  180;  and  Report  of 
the  Federal  Trade  Commission  on  the  Causes  of  High  Prices  of  Farm  Imple- 
ments, p.  679. 

*  Output  of  the  five  companies  entering  the  trust  in  1902. 

*When  the  number  produced  by  the  independents  was  not  known,  the 
number  sold  was  used  instead.  As  a  rule  it  made  little  difference  which  figure 
was  used. 


From  an  examination  of  this  table  it  appears  that  the  Inter- 
national Harvester  Company  increased  its  proportion  of  the 
output  of  binders  from  90.9  per  cent  in  1902  to  94.2  per  cent  in 
1903.  This  may  be  ascribed  chiefly  to  the  acquisition  in  1903  of 
the  important  Osborne  concern.  Beginning  in  1903  there  was 
a  decline,  until  in  1906  only  87.0  per  cent  of  the  output  was  pro- 
duced by  the  trust.  After  a  slight  increase  in  1907  and  1908  the 
percentage  declined  again  in  1909  to  87,  where  it  remained  in 

1910  and  191 1.  The  International  Harvester  Company,  there- 
fore, in  spite  of  the  acquisition  of  several  competitors,  did  not 
quite  hold  its  own.  Moreover,  it  is  significant  that  while  the 
total  output  of  the  independents  increased  between  1902  and 
191 1,  notwithstanding  the  acquisition  of  several  of  their  number 
by  the  Harvester  Company,  the  total  output  of  the  trust  ac- 
tually declined.  Nevertheless  the  International  Company  still 
had  in  191 1  a  monopoly  position  in  the  manufacture  of  binders. 
Between  191 1  and  1918,  however,  the  company  lost  heavily. 
Whereas  in  191 1  it  had  produced  87  per  cent  of  the  total  output, 
by  1918  its  percentage  had  fallen  to  65.3  per  cent.^  This  marked 
decline  was  partly  due  to  the  growth  of  some  of  its  competitors, 
and  partly  due  to  the  falling  off  in  19 18  of  the  export  trade,  in 
which  the  International  Harvester  Company  was  the  leading 

The  situation  with  resp)ect  to  mowers  is  shown  in  the  table 
on  page  245.^ 

As  with  binders,  the  International  Harvester  Company, 
through  the  acquisition  of  the  Osborne  concern,  increased  its 
proportion  of  the  country*s  output  of  mowers  in  the  year  after  its 
organization.  In  1902  the  company  produced  82.5  per  cent  of  the 
mowers  produced  in  this  country;  in  1903,  87.7  per  cent.  Yet 
its  proportion  since  1903  has  shown  a  declining  tendency.    In 

191 1  it  amounted  to  76.6  per  cent,  and  in  1918  to  only  59.5  per 

*  Report  of  the  Federal  Trade  Commission  on  the  Causes  of  High  Prices 
of  Farm  Implements,  p.  679. 

*  Report  on  the  International  Harvester  Company,  p.  182;  and  Report  of 
the  Federal  Trade  Conmiission  on  the  Causes  of  High  Prices  of  Fann  Imple- 
ments, p.  679. 



Production  of  Mowers  in  the  United  States,  1902 

-1911,  1918 

Iniemational  Harvester  Co. 

Independents  * 


Per  cent 


Per  cent 










191 1 


324,180  « 



























23 -4 

cent.  Whereas  the  output  of  mowers  by  the  independents 
increased  nearly  7,000  between  1902  and  1918,  that  of  the  trust 
declined  by  over  210,000. 

The  data  for  rakes  are  not  so  complete.  The  Bureau  esti- 
mated, however,  that  the  five  companies  merged  into  the  Inter- 
national Harvester  Company  produced  in  1902,  67.8  per  cent 
of  the  rakes;  that  in  1903,  with  the  acquisition  of  the  Osborne 
Company,  the  proportion  probably  exceeded  80  per  cent;  and 
that  in  191 1  it  had  fallen  to  about  72  per  cent.'  The  per- 
centage in  1918  was  placed  by  the  Federal  Trade  Commission 

at  57.5-* 

The  dominant  position  of  the  International  Harvester  Com- 
p>any  is  well  brought  out  by  the  following  table,  which  shows  the 
number  of  harvesting  machines  of  all  kinds  sold  in  191 1  by  every 

'  When  the  number  produced  by  the  independents  was  not  known,  the 
number  sokl  was  used. 

*  Output  of  the  five  companies  entering  the  trust  in  1902. 

'Report  on  the  International  Harvester  Company,  p.  183.  According 
to  the  Brief  for  the  International  Harvester  Company  (no.  56),  p.  io8a,  the 
International  Company  in  1905  sold  77.8  per  cent  of  the  rakes  disposed  of  in 
this  country,  and  in  191 1,  67.8  per  cent. 

*  Report  on  the  Causes  of  High  Prices  of  Farm  Implements,  p.  679. 


concern  contributing  as  much  as  i  per  cent  to  the  country's  total 
sales,  and  the  percentage  sold  by  each.* 

Sales  of  Harvesting  Machines  in  the  United  States  in  19 ii,  with 


International  Harvester  Co 

Acme  Harvesting  Machine  Co 

Johnston  Harvester  Co 

Deere  and  Co 

Emerson-Brantingham  Co 

W.  A.  Wood  Mowing  and  Reaping  Machine  Co. . . . 

Adriance,  Piatt  and  Co 

Thomas  Mfg.  Co 









3  47 








1. 19 

Per  cent 

The  International  Harvester  Company  in  191 1  sold  over 
three-fourths  of  the  total  number  of  harvesting  machines  sold  in 
this  country.  Its  percentage  would  be  even  larger  were  it  cal- 
culated upon  a  basis  of  value  rather  than  of  number,  since  the 
company's  control,  generally  speakmg,  was  greatest  for  the 
higher  priced  machines,  such  as  grain  binders,  com  binders,  and 
headers.  The  next  largest  harvester  concern  was  the  Acme 
Company,  with  a  capital  of  $3,500,000  (the  capital  of  the  Inter- 
national Company  was  $70,000,000).^  The  Acme  Company 
sold  less  than  5  per  cent  of  the  harvesting  machines  sold  in  this 
country,  and  unlike  the  International  it  did  not  make  the  entire 
line  of  harvesting  machines.  The  only  independent  concern 
that  did  make  an  entire  line  was  the  Johnston  Harvester  Com- 
pany, capitalized  at  less  than  $2,000,000,  and  producing  less  than 
4  per  cent  of  the  total  output  of  harvesting  machines.  In  com 
binders  the  International  Company  in  191 1  had  only  three 
competitors;  in  reapers,  only  four;  and  in  grain  binders,  eight, 
four  of  whom  were  quite  unimportant.  In  mowers  and  rakes 
alone  was  there  any  considerable  number  of  competitors;  but 
none  of  them  had  as  much  as  8  per  cent  of  the  trade  in  either 
of  these  lines.'   Again,  hardly  any  of  the  independents  competed 

*  Brief  for  the  United  States  (no.  56),  p.  26. 

•Ibid.,  p.  no. 

'Ibid.,  p.  III. 


with  the  International  Company  throughout  the  whole  United 
States;  their  sales  were  confined  mainly  to  the  East,  especially 
New  York  state  and  the  New  England  states. 

Since  the  above  date  (1911)  a  number  of  strong  concerns  have 
entered  the  field.  Among  them  is  Deere  and  Company,  with  a 
capital  in  1911  of  $58,007,100.  This  e^q)ansio^  of  the  Deere 
Company  was  made  on  the  principle  of  carrying  a  full  line  (no 
company,  not  even  the  International,  had  a  really  complete  line 
of  farm  machinery),^  and  the  strong  selling  organization  already 
possessed  by  the  Deere  Company  and  by  other  independents 
made  it  easier  for  them  to  secure  a  good  share  of  the  harvesting 
machine  business  than  it  would  have  been  for  a  newly  organized 

So  far  as  the  lines  other  than  harvesting  machines  are  con- 
cerned, the  Bureau  of  Corporations  estimated  that  the  Interna- 
tional Harvester  Company  produced  in  1909  the  following  per- 
centages of  the  various  products.^ 

Com  shredders 55 . 7 

Binder  twine 55 .  i  (62 . 7  in  1911) 

Manure  ^readers 55.1  (1911) 

Spring  tooth  harrows 49.  i 

Disk  harrows 25.9  (43.1  in  1911) 

Hay  stacl^ers 24. 2 

Hay  loaders 20.8 

Farm  wagons 13.0  (about  15.0  in  1911) 

Wheeled  cultivators 11. 5 

Through  the  acquisition  of  other  companies  and  through  the 
expansion  of  its  own  plants,  the  International  greatly  increased 
its  output  in  the  new  lines.  Naturally  its  monopolistic  position 
in  the  harvesting  machine  trade  facilitated  this  development  of 
its  business. 

How  is  the  ability  of  the  International  Harvester  Company  to 

*  The  acquisition  of  plow  plants  by  the  International  Harvester  Company 
in  1919  has  given  it  practically  a  full  line,  since  plows  were  practically  the 
only  type  of  farm  implement  it  was  not  then  producing. 

•Report  on  the  International  Harvester  Company,  pp.  184-188.  The 
estimate  is  based  on  the  Census  reports  and  the  production  of  the  Interna- 
tional Company  as  given  in  its  annual  reports. 



maintain  its  semi-monopolistic  position  to  be  explained?  The 
chief  sources  of  its  power  seem  to  have  been  two:  fii^^t^  its  pro- 
ductive  efficiency;  J^y^nH^  jtt  pnmfnninn  nf  ^rgf  firifi^'*^  re- 

rirat.  The  International  Harvester  Company,  generally 
speaking,  produced  it^  machines  at  a  lower  cost  than  its  com- 
petitors. This  was  especially  true  of  grain  binders,  the  most 
important  harvesting  machine.  Thus,  the  average  factory  cost 
of  producing  binders  at  the  domestic  plants  of  the  International 
Harvester  Company  during  the  two  years  1910  and  191 1  com- 
bined was  $56.32,  the  figures  for  the  different  plants  being 
$54.11,  $56.30,  $64.94  and  $73.78.^  (These  factory  costs  do  not 
include  general  and  miscellaneous  expenses,  nor  a  very  large 
item  of  selling  expense.)  The  average  factory  cost  for  the  four 
leading  independents  was  $70.83.  (To  some  extent  these  dif- 
ferences in  cost  resulted  from  diflFerences  in  the  machines,  though 
the  machines  were  substantially  similar  in  type.)  For  only  two 
of  the  four  independents  was  the  factory  cost  distinctly  below 
the  highest  factory  cost  of  the  International  Harvester  Com- 
pany, and  for  one  independent  the  factory  cost  was  distinctly 
higher  than  the  cost  in  any  of  the  four  factories  of  the  Inter- 
national Company.  In  each  instance  the  output  of  the  inde- 
pendent plants  was  much  smaller  than  the  output  of  any  of  the 
International  Company's  plants,  except  one.  The  relative 
smallness  of  the  independent  plants  largely  explains  their  higher 
factory  costs.  If  we  prorate  over  the  total  factory  costs  the 
general  and  miscellaneous  expenses  not  included  in  the  foregoing 
figures,  the  showing  of  the  independent  plants  is  even  less 
favorable.  While  this  may  be  the  result  in  part  of  different 
methods  of  keeping  costs,  it  is  unquestionably  due  in  consider- 
able measure  to  the  comparatively  small  output  of  the  inde- 

'  Report  on  the  Intematioiial  Harvester  Company,  p.  260.  The  basb  of 
the  discussion  of  costs  that  follows  is  the  above  report,  pp.  260-265.  It 
should  be  noted  that  the  raw  materials  which  are  produced  by  the  Inter- 
national Company  for  its  own  use  are  charged  up  to  costs  on  the  basis  of  the 
prevailing  market  prices,  and,  therefore,  its  costs  arc  comparable  with  those 
of  the  independent  producers. 


pendent  plants.  If  we  add  the  general  and  miscellaneous  ex- 
penses to  the  factory  costs,  the  average  cost  of  binders  for  the 
International  Harvester  Company  during  1910-1911  becomes 
$58.57,  and  for  the  independents  $76.18.  This  difference  is  con- 
siderable, yet,  it  should  be  noted,  it  is  no  larger  than  the  differ- 
ence between  the  costs  at  the  several  International  plants. 

The  foregoing  differences  in  costs  must  not  be  understood  to 
indicate  the  relative  profit  per  machine,  since  the  selling  expense 
of  the  International  Company  was  much  higher  per  machine 
than  that  of  the  independents.  Apparently  this  high  selling 
expense  was  the  result  of  its  elaborate  selling  organization, 
which  strengthened  its  hold  on  the  trade  and  aided  it  in  obtain- 
ing a  large  volume  of  business.  Yet  it  is  still  true,  in  spite  of  its  ' 
high  selling  expense,  that  the  margin  of  profit  for  the  Interna- 
tional Company  was  larger  than  it  was  for  the  independents. 

The  International  Harvester  Company  thus  found  one  of  its 
chief  sources  of  power  in  its  lower  cost  of  producing  binders, — 
the  most  important  machine  in  the  harvester  trade. 

Much  the  same  was  true  of  mowers  and  rakes.  The  factory 
cost  of  mowers  at  the  four  plants  of  the  International  Company 
ranged  during  the  period  1910-1911  from  $18.78  to  $27.35,  ^^^ 
averaged  $20.09.  ^^^  ^^  independents  the  average  was  $24.98. 
For  some  of  the  independent  plants,  therefore,  the  cost  was  less 
than  for  some  of  the  International  Company  plants;  in  fact,  at 
aU  the  independent  plants  the  factory  cost  was  lower  than  at  the 
plant  of  the  International  Company  with  the  highest  cost,  and 
at  aU  but  two  of  the  independent  plants  the  factory  cost  was  ^jr 
lower  than  at  the  plant  of  the  International  Company  with  the  7 
second  highest  cost.  While  some  of  the  independent  plants 
produced  more  mowers  than  did  the  smallest  International 
plant,  yet  most  of  them  produced  less.  None  of  the  independ- 
ents, however,  had  an  output  which  could  compare  with  that  of 
the  McCormick  and  the  Deering  plants,  and  as  a  result  their 
costs  were  higher  in  comparison.  As  with  binders  the  selling 
expense  was  less  fc(  the  independent  concerns. 

The  average  cost  of  rakes  for  the  International  Company  was 
$10.84,  and  for  the  independents  $12.47.    The  factory  cost  for 


the  most  efficient  independent  plants  was  thus  much  nearer  the 
factory  cost  for  the  most  efficient  of  the  International  Company 
plants  than  for  either  binders  or  mowers,  and  therefore  the 
advantage  of  the  trust  was  less  in  this  branch  than  in  the  other 
two  leading  branches. 

It  is  clear  from  what  has  been  said  that,  generally  speaking,  the 
International  Harvester  Company  could  produce  harvesting 
machines  more  cheaply  than  its  competitors.^  It  seems  evident, 
also,  that  this*  advantage  was  mainly  due  to  the  large  volume  of 
its  output.  In  the  harvester  business  the  process  of  manufac- 
ture, which  requires  the  use  of  a  considerable  variety  of  raw 
materials,  is  highly  elaborate,  and  large  factories  with  expensive 
equipment  are  necessary.  Low  production  costs  can  be  attained 
only  through  a  minute  division  of  labor;  and  this  involves  pro- 
duction on  a  large  scale.  It  was  in  the  largest  plants  of  the  Inter- 
national Company,  namely,  the  McCormick  and  the  Deering 
plants,  that  the  lowest  costs  were  attained;  and  in  some  of  the 
smaller  plants  the  costs  were  even  higher  than  for  the  independ- 
ents. The  advantage  of  the  trust  in  production  rested,  therefore, 
to  a  very  large  degree  on  the  fact  that  it  included  the  two  largest 
plants.^  The  important  query,  therefore,  is  not  whether  the 
trust  could  produce  more  cheaply  than  its  smaller  rivals  (this 
can  hardly  be  disputed),  but  whether  the  McCormick  and  Deer- 
ing plants,  the  largest  in  the  country  in  1902  (and  because  of  the 
volume  of  their  output  possessing  the  lowest  costs)  became  more 
efficient  by  virtue  of  the  fact  that  they  entered  the  trust.  To 
this  question  no  definite  answer  can  be  given.  One  fact,  how- 
ever, is  clear.  The  organization  of  the  International  Harvester 
Company  did  not  reduce  the  costs  of  the  McCormick  and  Deer- 

^  For  a  comparison  of  the  cost  of  producing  harvesting  machines  in  1916 
and  in  19 18  at  the  McCormick  works  of  the  International  Company  and  at 
five  independent  plants,  see  Report  of  the  Federal  Trade  Comniission  on  the 
Causes  of  High  Prices  of  Farm  Implements,  p.  669. 

*The  output  of  binders  at  the  McCormick  plant  during  each  year  from 
1903  to  191 1  exceeded  by  at  least  eight  times  the  cmtput  of  binders  at  any 
independent  plant  during  the  corresponding  year.  Ae  output  of  mowers  at 
the  McCormick  plant  was  six  times  greater  than  the  output  of  any  independ- 


ing  plants  through  an  increase  in  the  volume  of  their  output 
(perhaps  the  most  important  factor  leading  to  low  costs),  be- 
cause the  volume  of  production  at  these  plants  was  as  great  prior 
to  the  merger  as  at  any  subsequent  date.^ 

Second.  Another  element  of  strength  was  the  possession  by 
the  International  Harvester  Company  of  large  financial  re-  \ 
sources.  This  enabled  it  to  maintain  an  elaborate  selling  organi-  \ 
zation, — an  organization  to  handle  not  only  harvesting  machines, 
but  a  great  variety  of  agricultural  implements,  such  as  wagons, 
spreaders,  etc.,  with  a  consequent  saving  in  the  cost  of  market- 
ing. The  possession  of  large  financial  resources  also  made  it 
possible  for  it  to  grant  long  terms  of  credit  to  purchasers.  The  l 
practice  of  extending  credit  for  considerable  periods  was  origi- 
nally employed  in  the  harvester  business  because  of  the  inability 
of  the  farmers  to  pay  cash  (binders,  for  example,  are  quite  ex- 
pensive); and  though  farmers  are  now  in  a  better  position  than 
formerly  to  pay  cash,  the  system  is  still  used  as  a  means  of  getting 
trade,  particularly  in  foreign  countries.  The  International 
Company,  acquiring  a  strong  financial  position  by  the  act  of 
combination,  not  only  retained  this  practice  in  the  harvesting 
machine  business,  but  more  conspicuously  than  any  other  con- 
cern extended  it  to  the  newer  lines,  which  are  generally  less 
expensive,  and  which  were  formerly  sold  on  a  cash  basis.  The 
company  was  aided  in  carrying  out  this  policy  by  the  backing  of 
J-  P.  Morgan  and  Company,  its  fiscal  agents,  and  by  the  loans  of 
Mr.  John  D.  Rockefeller,  a  father-in-law  of  one  of  the  McCor- 

The  charge  has  been  made  that  the  International  Harvester 
Company,  especially  in  the  years  immediately  following  its 
organization,  resorted  to  imfair  competitive  methods.  This 
charge  may  be  briefly  considered. 

(i)  The  International  Company  up  to  1905  paraded  as  inde- 
pendent certain  concerns  that  in  reality  were  not  independent. 
The  most  important  of  these  concerns  was  the  firm  of  D.  M. 
Osborne  and  Company.  This  practice,  however,  came  to  an  end 
in  1905. 

'  Report  on  the  International  Harvester  Company,  pp.  257-258. 


(2)  The  International  Company  in  its  commission  agency 
1/   contracts  up  to  1905  inserted  a  clause  requiring  the  dealer  to 

handle  the  company's  harvesting  machines  exclusively.^  With 
trust  proceedings  threatening  in  several  states,  this  clause  was 
removed  in  1905,  and  was  not  restored.^  In  fairness  to  the 
company  it  should  be  said  that  the  exclusive  contract  clause  was 
customary  among  harvester  companies  prior  to  the  establish- 
ment of  the  merger,  and  that  some  concerns  in  the  implement 
trade  continued  to  retain  it  in  their  agency  contracts  even  after 
it  was  abandoned  by  the  International  Company.'  It  mi^t 
seem  as  if  there  were  no  objection  to  the  requirement  that  a 
dealer  handle  the  goods  of  only  one  company,  since  such  a  provi- 
sion has  the  obvious  advantage  of  enlisting  the  interest  of  the 
dealer  in  the  selling  of  the  manufacturer's  article.  Yet  it  should 
be  clear  that  this  requirement  may  result  in  monopoly.  If  there 
are  only  a  few  dealers  in  a  given  town,  and  each  one  of  these  is 
given  some  brand  of  the  trust's  harvesters,  the  requirement  of 
exclusive  dealing  may  shut  out  the  machines  of  the  independent 
manufacturers,  particularly  if  the  machines  of  the  trust  are  in 
such  insistent  demand  that  a  dealer  must  handle  them  if  he  is  to 
do  a  profitable  business. 

(3)  The  International  Company  so  allotted  its  brands  of  har- 
^  vesting  machines  as  to  enlist  the  services  of  an  undue  proportion 

of  dealers.^  Some  95  per  cent  of  the  farm  machinery  in  this 
country  was  purchased  from  the  local  retail  dealer;  and  at  most 
towns  there  were  only  two  or  three  dealers.^  The  International 
Company  by  giving  only  one  brand  of  its  machines  to  a  particu- 
lar dealer  was  able — so  the  Bureau  of  Corporations  put  it — to 
absorb  the  services  of  all  or  at  least  a  large  proportion  of  the 
dealers  in  any  one  locality.  The  opinion  was  common  in  the 
trade  that  the  purpose  of  the  company  in  giving  a  different  line 

'  81  Kansas  Reports  611.    According  to  Brief  for  the  International  Har 
vester  Company  (no.  56),  p.  96,  this  clause  was  not  enforced. 

*  Report  on  the  International  Harvester  Company,  p.  304. 

*  Brief  for  the  International  Harvester  Company  (no.  757),  p.  80. 

*  Report  on  the  International  Harvester  Company,  p.  290. 
» Ibid.,  pp.  291,  293. 


to  each  dealer  was  largely  to  prevent  these  dealers  from  pushing  J 
the  sales  of  the  goods  of  competmg  manufacturers.  The  repre- 
sentatives of  the  company  denied  that  they  had  any  such  pur- 
pose; and  urged  that  even  if  this  was  the  effect,  as  claimed  by 
the  Bureau  of  Corporations,  it  was  not  an  imfair  method  of 
competition,  if  not  accompanied  by  a  requirement  of  exclusive 

(4)  Complaint  was  also  made  that  in  some  cases  the  Inter-   ' 
national  Company  resorted  to  local  price  cutting.    While  there 
may  have  been  instances  of  resort  to  this  device,  yet  in  general 
it  was  the  practice  of  the  company  to  charge  dealers  uniform 
prices  for  similar  machines.^ 

(5)  The  International  Company  through  its  industrial  rail- 
ways obtained  excessive  divisions  of  the  through  rate  on  the 
transportation  of  its  goods  to  market.  This  was  brought  to 
li^t  through  an  investigation  of  the  Interstate  Commerce  Com- 
mission in  1904.^  The  Illinois  Northern  Railway  and  the  Chi- 
cago, West  Pullman  and  Southern  Railway  (both  controlled  by 
the  International  Company)  operated  terminal  railroads  in  the 
city  of  Chicago.  For  the  switching  services  performed  by  them 
a  reasonable  compensation  would  have  been  $3.50  and  $3.00  per 
car,  respectively.  In  fact,  however,  these  tap  lines  received  a 
division  of  the  through  rate  amounting  in  some  cases  to  as  much 
as  $12  per  car.  The  Commission  held  that  the  excess  of  the 
amoimt  received  by  the  industrial  railways  of  the  International 
Company  over  a  reasonable  payment  was  in  its  essence  a  rebate 
to  the  company.  This  use  of  the  industrial  railway  to  evade 
the  prohibitions  of  the  law  forbidding  rebates  now  stands  defi- 
nitely prohibited,  and  there  is  no  evidence,  so  far  as  the  author 
is  aware,  that  the  International  Company  continued  to  employ 
the  device.*    Certainly  there  would  be  no  advantage  to  the 

1  Brief  for  the  International  Harvester  Company  (no.  56),  pp.  101-102. 

'  Report  on  the  International  Harvester  Company,  p.  325. 

» See  10  I.  C.  C.  Reports  385-404. 

^According  to  President  Roosevelt  (in  a  letter  dated  August  22,  1907) 
the  International  Harvester  Company  promised  in  1904  to  rectify  the  prac- 
tices disclosed  by  the  investigation  of  the  Interstate  Commerce  Commission, 


company  in  its  employment  after  1913,  since  in  that  year  the 
industrial  railways  were  transferred  to  a  separate  corporation, — 
the  International  Harvester  Corporation. 

The  International  Company  also  made  use  of  price  lists,  and 
its  salesmen  were  guilty  of  misrepresenting  the  machines  of 
competitors.^  Yet  on  the  whole  the  conduct  of  the  company  was 
remarkably  free  from  unfairness  in  its  relations  with  comf)eti- 
tors.^  Even  its  competitors  testified  to  this  effect.  Most,  if  not 
all,  of  its  objectionable  practices  were  abandoned  some  time 
before  the  government  instituted  its  dissolution  suit;  or  were 
the  result  of  competition  between  agents,  and  were  not  coun- 
tenanced by  the  higher  officials  of  the  company. 

The  company,  furthermore,  was  not  bolstered  up  by  the 
control  of  the  limited  supply  of  a  natural  resource  (its  control 
over  the  raw  material  used  to  make  binder  twine, — ^manilla  and 
sisal  fiber, — ^may  possibly  be  an  exception  to  this  general  state- 
ment); its  monopoly  position  was  not  due  to  patent  rights  (the 
basic  patents  had  expired  prior  to  its  organization);  and  such 
tariff  protection  as  it  has  had  has  been  unimportant.^  If,  there- 
fore, there  is  such  a  thing  as  a  "good  trust"  the  International 
Harvester  Company  can  doubtless  qualify  as  well  as  any  other. 
The  suit  brought  by  the  government  against  this  company  thus 
squarely  presented  to  the  courts  the  question  as  to  whether  a 
trust  is  illegal  or  not,  irrespective  of  the  methods  employed  by*it.* 

The  estabhshment  by  the  International  Company  of  a  monc^ 
oly  position  and  the  substantial  maintenance  of  that  position 
for  a  number  of  years  have  been  shown.  What  has  been  the 
policy  of  the  monopoly  with  respect  to  prices? 

and  it  stood  ready  in  1907  to  prove  that  it  had  abided  by  its  promise.  Cong. 
Record,  April  25,  191 2,  p.  5318. 

^  Report  on  the  International  Harvester  Company,  i>p.  310,  324. 

'There  can  be  no  doubt,  said  Judge  Sanborn  of  the  Circuit  Court,  "that 
the  consistent  and  persbtent  purpose,  policy,  rule  of  action,  and  practice  of 
the  defendants  has  been  and  is  to  avoid  and  prevent  all  acts  and  methods 
imfair,  unjust,  or  oppressive  toward  their  competitors."    214  Fed.  Rep.  1008. 

*  Since  the  passage  of  the  tariff  act  of  1913  agricultural  implements  can  be 
imported  free  of  duty. 

*  Cf .  p.  436. 


The  significant  comparison,  of  course,  is  between  prices  prior 
to  1902  and  prices  after  1902.  The  only  evidence  on  this  point 
that  has  come  to  our  attention  is  a  table  prepared  by  the  Inter- 
national Harvester  Company,  showing  the  price  of  six  foot 
binders  and  five  foot  mowers  from  1892  to  1912.^  From  this 
table  it  appears  that  the  price  of  binders  advanced  in  1900  and 
1 901  (the  two  years  prior  to  the  organization  of  the  trust),  but 
fell  in  1902  (the  year  the  trust  was  organized)  to  its  former  figure, 
where  it  remained  through  1907.  Substantially  the  same  was 
true  of  the  price  of  mowers.  The  government  in  its  Brief  con- 
ceded that  the  circular  or  asking  prices  of  harvesting  machines 
had  not  materially  advanced  since  1902,  but  contended  that  the 
prices  actually  received  were  not  the  same.^  Upon  the  organiza- 
tion of  the  trust — so  it  alleged — the  constant  shading  of  prices 
was  stopped,  thus  leading  to  an  actual  increase  in  the  return 
realized  by  the  International  Harvester  Company.  The  defend- 
ants counter  attacked  by  pointing  out  that  the  government  had 
not  called  a  single  witness  to  testify  that  prices  had  been  ad- 
vanced to  the  injury  of  the  farmer,  thus  leading  to  the  presump- 
tion that  no  such  injury  had  in  fact  resulted.' 

The  course  of  prices  from  1903  to  191 1  for  certain  kinds  of 
farm  machinery  is  shown  by  the  table  on  page  256. 

The  table  shows  the  average  prices  realized  by  the  Inter- 
national Company  for  its  chief  classes  of  machines.  Slight 
changes  in  prices  from  year  to  year  *do  not,  it  should  be  noted, 
necessarily  indicate  any  actual  change  in  the  prices  charged. 
This  is  because  these  prices  are  generally  averages  for  all  types 
and  sizes  of  a  given  machine,  and  a  variation  in  the  proportion 
of  machines  of  the  various  sizes  sold  would  naturally  cause  a 
change  in  the  average  price  received,  even  though  in  the  meantime 
there  had  been  no  change  in  the  price  of  any  particular  machine. 
Yet  making  full  allowance  for  such  factors,  it  is  still  true  that 
during  the  period  from  1903  to  191 1  there  was  a  general  advance 

'  See  Appendix  to  Brief  for  the  International  Harvester  Company  (no. 
624),  p.  286. 
'  Brief  for  the  United  States  (no.  56),  p.  171. 
*  Brief  for  the  International  Harvester  Company  (no.  757),  p.  127. 







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in  the  price  of  harvesting  machines.  For  example,  in  1908  the 
price  of  5,  6,  and  7  foot  binders  was  advanced  by  $7.50;  the  price 
of  8  foot  binders  by  $15.00  (1907  and  1908);  and  the  price  of 
mowers  by  $2.50.  Yet  to  conclude  from  this  statement  that  the 
trust  made  for  higher  prices  would  not  be  fair.  Prices  of  mate- 
rial and  of  labor  were  undoubtedly  rising,  and  an  increase  in  prices 
might  therefore  have  taken  place,  trust  or  no  trust.  Again,  the 
quality  of  the  machines  might  have  improved  in  the  meantime.^ 
As  bearing  on  the  responsibility  of  the  trust  for  the  advance,  we 
may  note  that  the  prices  of  disk  harrows  and  two-horse  wagons, 
in  the  manufacture  of  which  competition  was  quite  active,  were 
also  advanced  in  1908.  Again,  in  191 2  the  International  Com- 
fwiny  made  a  general  reduction  in  the  price  of  its  harvesting 
machines.  Grain  binders  were  reduced  $5.00,  and  proportionate 
reductions  were  made  for  other  harvesting  machines.  This 
reduction  was  attributed  by  the  company  to  a  decline  in  the 
cost  of  production,  yet  it  is  perhaps  significant  that  it  was  made 
after  the  government  had  begun  preparations  to  file  a  bill  against 
the  company. 

Some  idea  of  the  reasonableness  of  the  prices  charged  may  be 
had  by  an  analysis  of  the  profits  realized.  The  profits  of  the  In- 
ternational Company  may  be  determined  by  two  methods:  first, 
by  a  comparison  of  its  net  earnings  with  its  net  assets;  second,  by 
a  comparison  of  its  net  earnings  with  its  capital  stock  and  sur- 
plus.   The  table  below  shows  the  results  by  the  first  method.^ 

Ratio  of  Net  Earnings  to  Net  Assets,  Exclusive  of  Good  Will,  as 

Computed  by  the  Bureau,  1903-1911 

Year  Ratio  Year  Ratio 

1903 •  p.73«  1908 8.73 

1904 5-34  1909 ^3-43 

1905 7.01  1910 12.77 

1906 6.74  1911 II.  51 

1907 731 

*  The  International  Company  claims  that  this  was  the  fact.  Brief  for  the 
International  Harvester  Company  (no.  56),  p.  52. 

'  Report  on  the  International  Harvester  Company,  p.  238. 

»  This  is  for  a  period  of  fifteen  months.  For  an  explanation  of  the  low 
earnings  in  1903,  see  ibid.,  pp.  207-210. 


The  average  rate  of  earnings  for  the  nme  years  was  8.47  per 
cent;  and  if  we  leave  out  the  exceptional  year  1903  the  average 
was  over  9.00  per  cent.  A  striking  fact  is  the  gradual  increase 
in  the  prosperity  of  the  company.  The  rate  of  profit  averaged 
4.36  per  cent  during  the  first  three  years;  7.59  per  cent  during  the 
next  three  years;  and  12.57  per  cent  during  the  three  years 
following  the  price  advance  of  1908.  Hence  while  the  profits  of 
the  company  were  quite  reasonable  on  the  average,  during  the 
later  years  they  were  distinctly,  higher.  It  should  be  remem- 
bered, however,  that  in  these  figures  no  allowance  is  made 
for  good  will.  The  company  made  no  entry  for  good  will  on  its 
books,  and  the  Bureau  found  it  difiicult  to  compute  its  amount. 
Were  good  will  to  be  included  in  the  net  assets,  the  rate  of  profit 
would  be  much  lower. 

The  second  method  is  to  show  the  profits  on  the  capital  stock 
and  surplus. 

Ratio  of  Net  Earnings  as  Reported  by  the  International  Harvester 
Company  to  Capital  Stock  and  Surplus,  1903-1911  * 

Year  Ratio         Year  Ratio 

1903 4- 70*        1908 6.73 

1904 4.64  1909 10.89 

1905 6.08  1910 10.91 

1906 5-85  1911 9.9s 

1907 6.31 

The  earnings  on  the  capital  stock  and  surplus  averaged  7.34 
per  cent  for  the  nine  years  and  10.58  per  cent  for  the  last  three 
years.  These  figures  are  somewhat  below  the  ratio  of  earnings 
to  net  assets,  since  the  Bureau  found  the  company  to  be  slightly 
overcapitalized  at  its  organization.^   Yet  had  the  good  will  been 

^  Appendix  to  Brief  for  the  International  Harvester  Company  (no.  624), 
pp.  163-164. 

'Computed  on  the  capital  stock  ($120,000,000). 

*  Through  the  reinvestment  of  surplus  earnings  the  original  deficiency  in 
physical  assets  had  been  entirely  overcome  by  the  end  of  1908,  and  up  to  the 
stock  dividend  of  19 10,  at  any  rate,  the  company  was  undercapitalized 
rather  than  overcapitalized.  Report  on  the  International  Harvester  Com- 
pany, p.  25. 


included  in  making  the  earlier  calculation,  the  result  might  have 
been  diflferent. 

It  is  apparent  that  by  either  method  of  calculation  the  earnings 
of  the  International  Company  were  moderate.^  And  even  more 
moderate  were  the  dividends  actually  disbursed  to  stockholders. 
The  rate  of  dividend  was  3  per  cent  in  1903,  and  4  per  cent  in 
1904,  1905,  and  1906.  In  the  latter  year  the  stock  was  divided 
into  $60,000,000  preferred  and  $60,000,000  common.  On  the 
preferred  a  rate  of  7  per  cent  was  begun  in  June,  1907,  and  this 
rate  was  regularly  paid  thereafter.  No  dividend  was  paid  on  the 
common  stock  during  1907-1909.  In  1910  a  33  1/3  per  cent 
common  stock  dividend  was  declared,  and  a  quarterly  dividend 
of  I  f)er  cent  inaugurated.  In  191 1  the  rate  was  increased  to 
I  1/4  per  cent  quarterly. 

It  is  worth  noting,  in  closing  this  subject,  that  the  rate  of  profit 
obtained  by  the  International  Company  was  much  greater  for 
its  highly  monopolized  lines — that  is,  harvesting  machines — 
than  for  the  newer  lines,  such  as  wagons  and  spreaders.  ^  In  other 
words,  the  influence  of  monopoly  on  prices  and  profits  is  some- 
what obscured  by  the  fact  that  the  figures  given  are  for  the  total 
profits  of  the  International  Company  rather  than  for  its  profits 
in  those  branches  that  were  monopolized. 

^  Some  tables  showing  the  earnings  of  the  International  Company  from 
1913-1918  may  be  found  in  the  Report  of  the  Federal  Trade  Commission  on 
the  Causes  of  High  Prices  of  Farm  Implements,  pp.  90-95. 

'  Report  on  the  International  Harvester  Company,  p.  240. 



Having  surveyed  the  trust  movement  and  having  studied  in 
detail  a  number  of  representative  trusts,  we  may  now  turn  to  an 
examination  of  the  underlying  causes  of  the  trust  movement. 
An  understanding  of  the  reasons  for  forming  trusts  will  enable 
the  reader  more  readily  to  comprehend  the  popular  attitude 
toward  them  as  evidenced  in  legislative  enactments  and  judicial 
proceedings;  and  will  greatly  assist  him  in  determining  what  the 
(>ubUc  poUcy  with  respiect  to  them  should  be. 

The  primary  explanation  of  the  trust  movement,  notably  that 
characterizing  the  period  from  1898  to  1903,  would  appear  to  be 
the  desire  of  the  manufacturersito  restrict  or  eliminate  competi- 
tion, and  thus  to  establish  monopoly  prices.  Whether  this 
competition  that  it  was  desired  to  eliminate  was  "  ruinous"  in  its 
nature  is  a  question  we  have  analyzed  elsewhere  at  considerable 
length,  the  conclusion  being  that  competition  can  not  properly 
be  regarded  as  ruinous,  except  possibly  in  a  quite  limited  range 
of  industries.^^A  secondary  influence  was  the  hope  of  achiev- 
ing the  economies  of  the  trust  form  of  organization, — a  topic 
that  will  receive  consideration  in  chapter  XIX.  _^Third,  though 
of  less  importance,  was  the  lure  of  large  profits  for  the  trust 
promoters,  men  who  conceived  the  idea  of  a  trust  in  a  given 
industry,  or,  if  they  did  not  conceive  it,  at  least  carried  it  through 
to  a  successful  consummation.  Th^re  were  other  incentives,  to 
be  sure,  such  as  the  ambition  of  certain  individuals  to  become 
Napoleons  of  industry,  but  undoubtedly  these  were  the  three 
principal  motives.    First,  then,  as  to  the  trust  and  prices. 

The  evidence  as  to  the  effect  of  trusts  on  prices  has  been  pre- 
sented for  a  number  of  trusts;  and  may  be  briefly  summarized  at 
this  point.    In  making  this  summary  and  throughout  the  sub- 

*  Quarterly  Journal  of  Economics,  34,  pp.  473-519  (1920). 



sequent  discussion  the  endeavor  will  be  made  of  course  to  avoid 
a  dogmatic  presentation;  the  difficulty  of  speakihgwith  positive- 
ness  on  this  perplexing  matter  is  fully  realized.  Jxis  easy  to  show  / 
that  on  innumerable  occasions  the  organization  of  a  trust  or  the  , 
tightening  of  monopoly  control  has  been  accompanied  by  high^ 
prices,  yet  one  can  not  always  be  certain  that  prices  would  not  I 
also  have  advanced  under  competitive  conditidns.    Despite  the 
diflSculties,  however,  it  is  believed  that  both  history  and  general 
reasoning  establish  the  tendency  of  the  trusts  to  increase  prices. 
First,  as  to  the  teachings  of  experience. 

One  of  the  earUest  and  most  powerful  trusts  was  the  Standard 
Oil  Company.  The  prices  charged  for  oil  by  this  company 
formed  the  subject  of  an  unusually  elaborate  study  by  the  Bu- 
reau of  Corporations,  as  the  result  of  which  the  Bureau  was  able 
to  speak  with  confidence  and  authority  concerning  the  eflFect  of 
the  oil  trust  on  prices.  The  Standard  Oil  Company,  so  the 
Bureau  noted,  had  repeatedly  claimed  that  it  had  reduced  the 
price  of  oil;  that  it  had  been  a  benefit  to  the  consumer;  and  that 
only  a  great  combination  like  the  Standard  could  have  furnished 
oil  at  the  prices  that  had  prevailed.  ''  Each  one  of  these  claims," 
said  the  Bureau,  ''is  disproved  by  this  report."  With  regard  to 
the  period  to  1897,  though  the  price  statistics  for  these  early 
years  were  by  no  means  complete,  yet  making  all  the  necessary 
allowances  "  they  demonstrate  the  falsity  of  the  historic  claim  of 
the  Standard  Oil  Company  that  by  reason  of  its  extraordinary 
eflSciency  it  has  brought  prices  to  a  point  lower  than  would  have 
been  reached  had  business  remained  under  normal  competitive 
conditions  and  in  the  hands  of  a  number  of  comparatively 
smaller  concerns."  ^  For  the  period  following  1897  and  down  to 
1905  the  statistics  were  very  full,  having  been  collected  by  the , 
Bureau  directly  from  thousands  of  retail  dealers  throughout  the 
country.  A  careful  analysis  of  these  figures  establishes,  said  the 
Bureau^  that  "  the  Standard  had  consistently  used  its  power  to 
raise  the  price  of  oil  during  the  last  ten  years,  not  only  absolutely 
but  also  relatively  to  the  cost  of  crude  oil."  ^   The  Bureau  as- 

*  Rqx>rt  on  the  Petroleum  Industry,  part  II,  p.  XXXm. 
» IbkL,  p.  XXX. 


serted  that  the  Standard  had  used  its  monopolistic  power  to 
"  oppress  the  public  through  highly  extortionate  prices,"  and  the 
truth  of  this  assertion  is  abundantly  demonstrated  by  the 
voluminous  evidence  presented  in  its  report  on  oil  prices. 

The  effect  of  trusts  on  prices  is  shown  in  illuminating  fashion 
by  the  experience  of  the  sugar  trust.  The  story  is  found  on 
pages  116-119.  Briefly  summarized,  it  appears  that  the  mai:gin 
between  the  price  of  raw  sugar  and  of  refined  sugar  was  high 
during  the  early  eighties,  and  declined  rapidly  after  1882  and 
until  1887  (the  year  in  which  the  sugar  " trust'*  was  formed). 
The  decline  in  the  margin  between  1882  and  1887  reflected  the 
keen  competition  that  prevailed, — a  competition  so  severe  that 
only  those  refiners  who  realized  the  economies  of  large-scale 
production  were  able  to  operate  at  a  profit.  Many  refiners, 
particularly  those  who  failed  to  envisage  the  inevitable  trend 
toward  larger  production  units,  were  indeed  obliged  to  withdraw 
permanently  from  the  business.  In  October,  1887,  the  "  trust 
agreement"  became  effective;  and  the  margin  rose  from  three- 
quarters  of  a  cent  per  pound  (in  1887)  to  one  and  one-quarter 
\tents  (in  1888),  an  increase  of  approximately  65  per  cent.  No 
doubt  the  margin  was  abnormally  low  prior  to  the  formation  of 
the  "trust";  and  therefore  it  is  difficult  to  say  how  much  of  the 
increase  is  fairly  attributable  to  it.  The  high  margin  of  1888, 
however,  speedily  attracted  new  competition;  and  as  a  result 
the  margin  fell  in  1890  to  an  even  lower  figure  than  during  the 
eighties.  In  1892  the  trust,  through  the  acquisition  of  a  number 
of  competitors,  secured  nearly  a  complete  monopoly  of  the  sugar 
refining  industry;  and  the  margin  was  considerably  advanced 
once  more.  As  before,  this  induced  new  competition,  as  the 
result  of  which  the  margin  fell  below  the  cost  of  refining.  Upon 
the  acquisition  of  several  competitors  in  1900,  prices  and  margins 
again  went  up;  but  this  led  to  the  construction  of  competing 
refineries,  and  in  1904  the  margin  again  declined.  Taking  there- 
fore the  first  eighteen  years  of  the  life  of  the  trust — the  margin 
after  1905  indicates  the  existence  of  competitive  conditions — it 
appears  that  sugar  prices  were  low  when  competition  was  pres- 
ent, and   were  advanced  when  competition   was  absent  or 


brought  under  control.  The  conclusion  seems  to  be  justified 
that  the  trust  made  for  high  prices,  and  that  it  did  Uttle,  if 
anything,  to  steady  them.* 

Trusts  in  the  steel  industry  seem  also  to  have  made  for  higher  ^ 
prices  of  steel  products.^  The  most  important  of  the  trusts 
organized  in  the  various  branches  of  the  iron  and  steel  industry 
during  1898  to  1900  were  the  American  Tin  Plate  Company,  the 
American  Steel  and  Wire  Company,  and  the  National  Tube 
Company — the  Carnegie  Company,  the  Federal  Steel  Company, 
and  the  National  Steel  Company  were  mammoth  combinations, 
the  first  two  doing  a  larger  business  in  the  aggregate  than  any  of 
the  steel  trusts,  yet  they  did  not  individually  monopolize  any 
important  branch  of  the  trade.  The  American  Tin  Plate  Com- 
pany was  organized  in  December,  1898,  for  the  purpose,  accord- 
ing to  its  president,  "  of  getting  together  to  do  away  with  foolish- 
ness in  making  prices."  ^  For  several  years  prior  to  its  formation 
the  price  of  tin  plates  had  shown  a  declining  tendency,  the 
average  monthly  price  at  New  York  per  hundred  pounds  being 
$3.50  in  January,  1896  (the  maximum  for  1896-1898),  and  $2.89 
in  December,  1898.*  From  that  month  on  it  steadily  increased 
until  by  September  of  the  following  year  it  had  reached  a 
monthly  average  of  $4.83,  or  nearly  $2.00  per  hundred  pounds 
higher  than  when  the  trust  was  formed.  The  price  remained  at 
this  figure  without  deviation  of  more  than  a  cent  until  August, 
1900.  By  October  of  1900  the  price  had  fallen  to  $4.19,  where 
it  remained  unchanged  for  two  years.** 

The  American  Steel  and  Wire  Company  of  New  Jersey  was 
organized  in  January,  1899.  During  the  preceding  year  the  price 
of  wire  nails  at  Pittsburg  had  averaged  $1.34  per  hundred 
pound  keg,  being  $1.29  in  December,  1898.*   The  price  advanced 

1  On  this  latter  point  see  Jenks  and  Clark,  The  Trust  Problem,  pp.  138-139. 
s  See  pp.  196-197,  203,  225-230. 
'  Industrial  Commission,  I,  p.  885. 

*  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  1047. 

*  Sec  Jenks,  Bulletin  of  the  Department  of  Labor,  vol.  V,  no.  29,  p.  735,  for 
a  table  showing  that  the  increase  in  the  price  of  tin  plate  during  1899  was 
much  greater  than  the  increase  in  the  cost  of  raw  materials. 

*  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  1045. 





Steadily  throughout  1899,  the  average  for  the  year  being  $2.32 
per  keg,  or  nearly  75  per  cent  higher.*  By  January,  1900,  the 
price  had  reached  $3.20  per  keg,  but  it  did  not  long  remain  at 
this  height.  The  outbreak  of  competition  during  the  middle  of 
1900  brought  the  price  down  to  $2.20  per  keg,  yet  this  was  much 
above  the  price  that  had  prevailed  prior  to  the  formation  of  the 
trust,  and  more  than  the  trust  was  able  to  get  in  the  years  that 
followed.  The  price  of  plain  wire  at  Pittsburg  followed  the  same 
general  movement.  From  a  figure  of  $1.13  per  hundred  pounds 
in  December,  1898,  it  rose  to  $3.05  in  January,  1900,  and  then 
declined  to  $2.15  in  May.  During  the  same  period  the  price  of 
barbed  wire  advanced  from  $1.75  per  hundred  poimds  to  $3.80 
per  hundred  pounds.^  Mr.  Gates,  the  chairman  of  the  company, 
testified  in  November,  1899,  that  the  rapid  advance  in  the  price 
of  barbed  wire  was  no  doubt  due  to  the  fact  that  the  company 
had  a  complete  monopoly.^ 

The  National  Tube  Company  was  organized  in  June,  1899. 
The  year  previous  to  its  formation  the  price  of  tubes  was  $30.00 
per  gross  ton;  the  year  of  its  formation,  $67.00  per  ton;  and  early 
in  the  year  after  its  formation,  as  high  as  $89.00  per  ton.* 

But  it  is  not  at  all  clear  to  what  degree  the  trusts  were  respon- 
sible for  these  increases  in  prices.  These  early  steel  trusts  were 
formed  during  a  period  of  prosperity,  which  would  have  led  to 
higher  prices  even  in  the  entire  absence  of  artificial  inflation. 
Costs,  moreover,  were  advancing,  since  the  prices  of  raw  mate- 
rials likewise  responded  to  the  heavy  demand.  The^ces  of  the 
finished  products,  however,  increased  more  rapidly  than  costs, 
and  as  a  result  profits  were  unusually  large.  Whether  prices  and 
thus  profits  were  higher  than  they  would  have  been  had  it  not 
been  for  the  trusts  is  a  question  that  can  not  be  answered  with 
certainty.    However,  such  would  appear  to  have  been  the  case; 

*  The  advance  in  prices  was  greater  than  the  increase  in  raw  material 
costs.  See  Jenks,  Bulletin  of  the  Department  of  Labor,  voL  V,  no.  29, 
p.  744. 

'  Brief  for  the  United  States  (no.  481),  vol.  IT,  p.  161. 
'  Industrial  Commission,  I,  p.  1009. 

*  See  p.  196. 


and  certainly  the  trust  organizers  in  enormously  overcapitaliz- 
ing the  properties  anticipated  such  an  outcome. 

As  is  indicated  by  the  table  on  page  203,  the  formation  of  the 
United  States  Steel  Corporation  ^as  not  followed  by  as  con- 
siderable an  advance  in  the  prices  of  steel  products  as  was  the 
case  on  the  formation  of  the  earlier  steel  trusts.  The  prices  in 
May,  1901  (the  first  month  after  the  organization  of  the  Corpo- 
ration) were  higher  than  the  prices  in  October,  1900  (the  last 
month  in  which  competition  was  active)  for  every  product 
shown  except  tin  plates,  yet  the  increase  was  not  so  noteworthy 
as  in  the  case  of  the  earlier  trusts.  No  doubt  a  partial  explana- 
tion is  the  fact  that  the  combination  and  trust  movement  in  this 
industry  during  1898  to  1900  had  already  established  prices  on  a 
high  level.  It  would  appear  also  that  the  managers  of  the  Cor- 
poration, profiting  by  the  experience  of  the  earlier  trusts,  had 
chosen  to  charge  more  moderate  prices  in  order  to  discourage 
potential  competitors.  The  real  influence  of  the  organization  of 
the  Steel  Corporation  would  be  best  shown,  of  course,  by  a 
comparison  of  the  prices  that  prevailed  in  1901  with  those  that 
would  have  prevailed  in  1901  (and  subsequent  years)  had  the 
battle  of  giants  been  allowed  to  proceed;  but  this  comparison 
obviously  cannot  be  made. 

The  extent  of  the  control  exercised  over  prices  by  the  Steel 
Corporation  is  well  shown  by  the  movement  (or  lack  of  move- 
ment) of  steel  rail  prices.  This  matter  is  discussed  on  page  229. 
The  Corporation's  practice  of  maintaining  the  ^aine^prices  over 
comparatively  long  periods  was  employed  also  in  the  case  of 
billets,  plates,  structural  steel,  tin  plates,  wire,  wire  nails,  bars, 
and  black  sheets,  though  by  no  means  to  the  same  degree.^ 
The  policy  was  possible,  however,  only  because  of  cooperation 
with  its  competitors  as  arranged  through  the  so-called  Gary 
dinners  and  other  devices.  That  these  prices  were  highly  prof- 
itable is  proven  by  the  enormous  profits  obtained  by  the  Cor- 
poration, enabling  it  within  fifteen  years  more  or  less  to  squeeze 
out  the  water  from  its  stock,  which  at  the  beginning  had  little 
behind  it  but  the  hope  of  monopoly  gains. 

*  Sec  Brief  for  the  United  States  (no.  481),  vol.  II,  pp.  1038-1047. 


The  tobacco  trust  was  fully  investigated  by  the  Bureau  of 
Corporations,  and  a  volume  deaUng  particularly  with  prices, 
costs,  and  profits  was  issued.  Nevertheless  for  several  reasons  it 
is  difficult  to  speak  positively  concerning  the  effect  of  the  trust 
on  prices.  Thus,  the  American  Tobacco  Company  when  or- 
ganized in  1890  secured  control  of  the  cigarette  business,  yet 
detailed  data  covering  prices  of  cigarettes  are  not  available  for 
the  years  prior  to  1893.  After  1893  the  net  price  of  cigarettes 
less  taxes  steadily  declined  until  1899,  and  then  rapidly  advanced 
abnost  uniformly  down  to  1910.^  However,  these  price  move- 
ments were  roughly  in  harmony  with  costs;  the  profit  per  thou- 
sand remained  fairly  steady  throughout  the  whole  period.  That 
the  prices  were  highly  remunerative  is  shown  by  the  analysis  of 
profits  on  pages  161  seq. 

The  proportion  of  the  little  cigar  business  done  by  the  trust 
is  not  known  for  the  years  prior  to  1898.  In  that  year  it  pro- 
duced less  than  50  per  cent  of  the  little  cigar  output  of  the 
country.  Its  share  of  the  business  steadily  increased  until  by 
1910  it  amounted  to  over  90  per  cent  of  the  total.  Likewise  the 
profit  per  thousand  steadily  increased,  being  41  cents  per  thou- 
sand in  1898,  and  $1.03  per  thousand  in  1910.^  Net  prices  (less 
tax)  were  no  higher  in  1910  than  in  1898,  but  costs  were  very 
much  lower.  The  trust  thus  kept  for  itself  all  the  benefits  of 
declining  costs. 

For  plug  tobacco  the  statistics  are  more  complete.'  In  1894 
the  net  price  of  plug  tobacco  less  taxes  amounted  to  29.1  cents 
per  pound.  At  that  time  no  one  company  dominated  the 
industry.  During  1894  the  American  Tobacco  Company 
instituted  a  campaign  for  the  domination  of  the  plug  business, 
and  prices  were  severely  cut,  falling  to  12.2  cents  per  pound  in 
1897.  Early  in  1898  a  combination  was  agreed  upon,  and  the 
price  for  the  year  rose  to  16.7  cents  per  poimd.  During  the 
following  year  the  Liggett  and  Myers  Tobacco  Company  was 

» See  p.  155. 

•  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  III,  p.  182. 

*  Sec  pp.  157-159- 


acquired,  and  the  price  averaged  21.0  cents,  and  in  1900,  22.8 
cents.  In  the  years  that  followed  control  was  made  eflFective, 
and  prices  and  profits  increased.  By  1908  (the  high-w^ter  mark 
for  prices  down  to  1910)  the  price  had  reached  30.3  cents,  and 
the  profit  8.0  cents,  as  compared  with  a  loss  during  each  year 
from  1895  to  1898.  The  appropriation  by  the  trust  of  the 
benefits  of  the  remission  of  the  Spanish-American  war  taxes  also 
testifies  to  the  power  and  workings  of  trusts. 

Similar  results  appear  upon  an  examination  of  the  prices  and 
profits  obtained  in  the  smoking  tobacco  and  snuff  branches.  A 
comparison  of  the  latter  business  (the  most  highly  monopolized 
branch  of  the  tobacco  industry)  with  the  cigar  business  (the 
least  monopolized  branch)  is  unusually  instructive  in  its  bearing 
on  the  comparative  results  of  monopoly  and  competition.  On 
this  point  the  reader  is  referred  to  page  159. 

The  data  are  not  available  to  determine  what  influence  has 
been  exerted  on  prices  by  the  harvester  and  shoe  machinery 
trusts,  the  two  remaining  trusts  of  those  described  in  some  detail. 
So  far  as  the  harvester  trust  is  concerned,^  it  does  not  appear  that 
it  has  increased  prices  to  an  appreciable  degree.  The  Depart- 
ment of  Justice  made  the  allegation  that  while  the  circular  prices 
of  harvesting  machines  were  not  increased  upon  the  organization 
of  the  trust  in  1902,  the  prices  actually  received  did  increase 
through  the  abandonment  of  price  cutting.  However,  the 
government  introduced  no  evidence  to  support  this  allegation, 
and  the  company  imequivocally  denied  it.  The  Bureau  of 
Corporations  in  its  report  on  the  International  Harvester  Com- 
pany devoted  comparatively  little  space  to  the  subject  of  prices, 
but  concluded  that  the  company  had  taken  advantage  of  its 
monopolistic  position  in  harvesters  to  increase  both  prices  and 
margins,  while  reducing  prices  in  those  outside  lines  in  which  it 
had  to  meet  keen  competition.^  It  is  easy  to  show,  of  course, 
that  there  was  a  general  advance  in  the  price  of  harvesters  during 
1903  to  191 1,  yet  this  was  a  period  of  rising  prices  and  costs,  and 
hence  it  would  not  be  fair  in  the  absence  of  complete  information 

>  Sec  pp.  254-257. 

*  Report  on  the  International  Harvester  Company,  p.  255. 


to  attribute  the  advance  to  the  trust,  particulariy  smce  the  price 
of  some  agricultural  implements  that  were  subject  to  competition 
likewise  advanced.  The  fact  is  that  the  International  Harvester 
Company  during  the  period  from  1903  to  191 1  earned  a  compara- 
tively moderate  return  on  a  capitalization  singularly  free  from 
water.  In  part,  of  course,  this  low  rate  of  return  resulted  from 
the  fact  that  its  profits  on  the  competitive  lines  were  combined 
with  its  profits  on  the  monopolized  lines,  thus  tending  to  obscure 
the  influence  of  monopoly  on  prices  and  profits. 

The  whisky  trust  is  not  one  of  the  concerns  described  in  detail 
in  the  preceding  chapters.  However,  the  prices  charged  by  it 
have  been  carefully  investigated  by  Professor  Jenks;  *  and  we 
may  sunmiarize  his  conclusions.  Professor  Jenks  points  out  that 
immediately  after  the  organization  of  the  whisky  "  trust"  in  1887 
the  prices  of  spirits  were  reduced  rather  than  advanced.  How- 
ever, this  reduction  in  prices  was  designed  to  force  the  remaining 
competitors  into  the  "trust";  and  when  this  purpose  had  been 
accomplished  prices  were  increased,  and  the  profits  became  very 
large.  The  profits  were  so  good  in  fact  that  new  distilleries  were 
constructed,  and  accordingly  in  1889  prices  had  to  be  cut  to  crush 
the  new  competition.  In  1890  the  "  trust "  reorganized  under  the 
corporate  form;  and  during  the  middle  of  1891  acquired  its 
principal  rival.  Prices  and  margins  thereupon  increased.  Early 
in  1893  the  price  and  the  margin  were  at  a  very  high  point,  but 
by  the  middle  of  1894,  because  of  competition,  speculation,  and 
poor  management  on  the  part  of  the  trust  officials,  the  price 
had  fallen  very  low,  and  the  margin  had  entirely  disappeared. 
In  January,  1895,  the  trust  went  into  the  hands  of  a  receiver. 

We  need  not  follow  the  whisky  trust  through  its  checkered 
career.  It  will  suffice  to  state  Professor  Jenks*  concludon  that 
the  trust  was  able  to  control  the  price  of  spirits  rather  effectively 
for  comparatively  short  periods  after  each  reorganization;  and 
that  at  times  it  used  this  control  to  increase  prices  and  margins, 
and  at  other  times  it  reduced  prices  to  injure  its  competitors.   On 

>  See  The  Trust  Problem  (191 7),  pp.  141-149;  Bulletin  of  the  D^>artment 
of  Labor,  vol.  V,  pp.  726-731;  Political  Sdence  Quarteriy,  4,  pp.  309-314, 
and  5,  pp.  495-497. 


the  whole,  however,  either  because  of  the  persistence  of  competi- 
tion or  because  of  the  policy  of  the  management,  prices,  down 
to  1898  at  least,  were  less  stable  than  prior  to  the  formation  of 
the  trust.*  In  the  later  years  of  its  life,  notably  after  1900,  the 
trust  adopted  the  policy  of  charging  more  moderate  prices  in 
the  hope  of  keeping  competition  within  boimds.^  Like  many 
other  trusts  it  had  foimd  that  a  grasping  policy  defeated  its  own 
ends  by  artificiaUy  stimulating  production,  and  thus  making 
impossible  the  maintenance  of  prices  at  a  profitable  level. 

That  the  trust  organizers  anticipated  that  the  establishment 
of  monopoly  conditions  would  permit  the  charging  of  prices 
above  a  competitive  level  is  indicated  by  the  huge  structure  of 
overcapitalization  that  they  erected.'  JGenerally  speaking,  the 
capitalization  of  the  trusts  was  twice  as  large  as  the  value  under 
competitive  conditions  of  the  properties  and  businesses  that  they 
acquired.  I  Usually  the  preferred  stock  represented  the  value  of  I 
the  plants  prior  to  their  union  in  the  trust,  and  the  common  stock  I 
the  hope  of  monopoly  profits.  Returns  on  the  common  stock  of 
the  trust,  unbacked  as  it  was  by  property,  might  be  reaped  were 
one  of  two  results  achieved :  first,  a  reduction  of  costs  consequent 
upon  the  realization  of  the  economies  of  the  trust  form  of  organi- 
zation; or  second,  the  elevation  of  prices  to  a  monopolistic  level. 
No  doubt  the  trust  organizers  intended  to  take  full  advantage  of 
both  of  these  opportunities  in  the  endeavor  to  earn  satisfactory 
dividends  on  the  common  stock  as  well  as  on  the  preferred  stock, 
yet  if  the  conclusions  of  chapter  XIX  are  soimd,  their  best  pros- 
pect of  success  was  through  the  raising  of  prices. 

That  the  common  stock  of  most  of  the  trusts  was  ''water,"      /  /  ' 
that  is,  had  no  actual  property  behind  it,  is  nowhere  seriously 
questioned.    The  following  well  authenticated  facts  bearing  on 

'  Bulletin  of  the  Department  of  Labor,  vol.  V,  p.  731. 

*  Industrial  Conunissiony  I,  p.  814. 

*  The  term  overcapitalizatbn  as  here  employed  refers  to  a  capitalization 
in  excess  of  both  the  investment  and  the  reproduction  cost.  A  successful 
trust  mi^t  be  able  to  earn  normal  returns  on  ^watered"  stock,  yet  this 
indicates  not  so  much  the  reasonableness  of  the  capitalization  as  the  enjoy- 
ment of  monopoly  profits. 


some  leading  trusts  would  appear  to  ''make  assurance  doubly 

The  value  of  the  property  acquired  by  the  Steel  Corporation 
in  1901  was  the  subject  of  a  painstaking  study  by  the  Bureau  of 
Corporations.^  In  this  investigation  three  different  bases  were 
used, — the  investment  of  the  constituent  companies  at  the  time 
of  their  formation,  the  average  market  value  of  their  securities 
from  the  date  of  their  organization  to  the  close  of  1900,  and  the 
value  of  the  properties  as  evidenced  by  a  physical  valuation. 
The  conclusion  of  the  Bureau  was  that  the  common  stock  of  the 
Corporation,  amounting  to  36  per  cent  of  its  total  capitalization, 
was  water;  and  that  from  one-fifth  to  two-fifths  of  the  preferred 
stock,  this  stock  also  amounting  in  the  aggregate  to  36  per  cent  of 
the  total  capitalization,  was  water,  the  amount  of  the  over- 
capitalization depending  on  the  basis  of  valuation  employed. 
By  either  the  investment  or  the  physical  valuation  basis,  slightly 
over  50  per  cent  of  the  total  capitalization  had  no  assets  behind 
it;  and  by  the  market  value  of  the  securities  basis,  reflecting,  as 
it  did,  the  monopoly  profits  of  the  constituent  companies,  the 
percentage  was  43.  This  tremendous  overcapitalization,  proven 
in  the  case  of  the  Steel  Corporation,  was  characteristic  also  of 
the  earlier  steel  trusts,  as  is  established  in  the  report  of  the 
Bureau  of  Corporations.^  This  was  admitted  also  by  Judge 
W.  H.  Moore,  a  well-known  trust  promoter,  when  in  testimony 
before  the  Industrial  Conmiission  he  said:  "everybody  knows 
what  they  are  getting  when  they  get  common  stock;  they  know 
they  are  not  getting  anything  that  represents  assets."  * 

The  various  tobacco  trusts  were  also  heavily  overcapitalized. 
The  cigarette  trust  (the  original  American  Tobacco  Company) 
was  capitalized  at  $25,000,000.    The  Bureau  of  Corporations 

*  See  pp.  208-210. 

•See  Report  on  the  Steel  Industry,  part  I,  pp.  127-133  (American  Steel 
and  Wre  Company);  pp.  133-136  (American  Tin  Plate  Company);  pp.  138- 
139  (American  Steel  Hoop  Company);  pp.  139-141  (American  Sheet  Steel 
Company);  pp.  141 -144  (National  Tube  Company);  and  pp.  144-145  (Shelby 
Steel  Tube  Company).  See  also  Brief  for  the  United  States  (no.  481),  vol.  I, 
pp.  22,  26,  29,  31,  ss. 

'  Industrial  Commission,  I,  p.  963. 


found  that  the  tangible  assets  of  the  constituent  companies 
amounted  to  $5,370462  (including  $1,825,354  in  notes  of  the 
organizers)/  and  the  good  will  to  $8,954,892;  or  an  overcapitali- 
zation exceeding  $10,000,000.^  The  Continental  Tobacco 
Company  (the  plug  tobacco  trust),  after  acquiring  the  Liggett 
and  Myers  Tobacco  Company  in  1899,  had  a  capitalization  of 
$97,690,700,  one-half  preferred  stock  and  one-half  common.  The 
company  entered  $26,831,123  of  this  on  its  books  as  tangible 
assets,  and  the  balance  ($70,859,577)  as  intangible  assets.  The 
Bureau  declared  that  the  value  of  the  intangible  assets,  meas- 
ured on  a  cash  basis,  was  not  over  $16,664,867;  and  the  over- 
capitalization therefore  amounted  to  $54,194,710.^  Over  55  per 
cent  of  the  company's  securities  might  therefore  be  regarded  as 
water.  The  American  Snuff  Company  (the  snuff  trust)  was  also 
heavily  overcapitalized.  At  its  organization  in  1900  it  was 
capitalized  at  $23,001,700,  of  which  $12,000,000  was  preferred 
stock  and  $11,001,700  common.  The  Bureau  found  that  the 
tangible  assets  of  the  constituent  concerns  were  worth  $4,312,- 
728,  and  the  good  will  not  over  $7,689,000,  or  a  total  of  not  to 
exceed  $12,001,728.  All  of  the  common  stock,  therefore,  was 

Despite  their  excessive  capitalization  these  trusts  all  paid 
large  dividends  on  their  stock,  water  and  all.  Their  ability  to  do 
so  testified,  as  said  before,  not  to  the  reasonableness  of  the  capi- 
talization, but  to  the  possession  of  monopoly  earnings.  In  con- 
trast, the  American  Cigar  Company,  which  hoped  to  monopolize 
the  dgar  industry,  earned  only  a  moderate  return  on  a  capital- 
ization free  from  water,  yet  this  was  because  it  did  not  succeed 
in  effecting  a  monopoly  of  its  branch  of  the  business,  and 
it  was  therefore  unable  to  raise  prices  above  a  competitive 

Among  the  other  trusts  that  were  overcapitalized,  some  of 

'  Against  these  notes  an  entry  was  immediately  made  on  the  books  of  the 
company  to  surplus,  so  that  the  capital  and  surplus  amounted  to  $26,825,354. 
*Sce  p.  123. 

'  Report  on  the  Tobacco  Industry,  part  II,  pp.  12,  99. 
^  Ibid.,  pp.  28-29. 


them  quite  heavily,  were  the  following:  the  American  Sugar 
Refining  Company,'  the  American  Can  Company,^  the  Dis- 
tilling and  Cattle  Feeding  Company  and  its  successors,*  the 
National  Starch  Manufacturing  Company  (the  starch  trust),* 
the  Glucose  Sugar  Refining  Company  (the  glucose  trust), ^  the 
Com  Products  Company  (the  starch  and  glucose  trust),*  the 
Com  Products  Refining  Company  (the  successor  to  the  Com 
Products  Company),'  the  International  Paper  Company,®  the 
American  Bicycle  Company ,•  the  American  Malting  Company,*® 
the  Asphalt  Company  of  America,**  the  Mount  Vemon-Wood- 
berry  Cotton  Duck  Company,  *^  the  National  Cordage  Company," 
the  National  Salt  Company,  **  the  National  Shear  Company,  *^  the 
New  England  Cotton  Yam  Company,**  the  Rubber  Goods 
Manufacturing  Company,*'  the  United  States  Leather  Com- 
pany,** and  the  United  States  Rubber  Company.** 

Some  tmsts,  on  the  other  hand,  have  been  capitalized  on  a 
moderate  basis.    Among  them  the  most  conspicuous  illustrations 

*  Industrial  Commission,  I,  p.  13  (Review  of  Evidence).  See  also  pp.  120- 

*  230  Fed.  Rep.  870-871,  877. 

*  Industrial  Commission,  I,  p.  14  (Review  of  Evidence). 

*  Ibid.,  XIII,  p.  673. 

*  Brief  for  the  United  States  in  United  States  v.  Com  Products  Refining 
Company  (no.  £-10-122),  p.  485;  and  Dewing,  Corporate  Promotions  and 
Reorganizations,  pp.  79,  532. 

*  Dewing,  op.  cit.,  pp.  89,  93-95. 
'Ibid.,  pp.  106,  108-109. 

'Industrial  Commission,  I,  pp.  409-410,  415-416,  419-420,  432-433,  441. 

*  Dewing,  op.  dt.,  pp.  254,  532. 
'*  Ibid.,pp.  278-279,  296,  532. 

"  Ibid.,pp.  432-433»  532. 
»*Ibid.,pp.  342-343,  532. 

*'  Industrial  Conunission,  XIII,  p.  130;  Dewing,  op.  dt.,  pp.  123,  532. 
"  Industrial  Commission,  XIII,  pp.  249-250;  Dewing,  op.  dt.,  pp.  207- 
208,  532. 
>^  Industrial  Commission,  I,  p.  1044. 
"Dewing,  op.  dt.,  pp.  313-316,  325,  532. 
"Industrial  Commissbn,  XIII,  pp.  37,  47. 
"Dewing,  op.  dt.,  pp.  20,  23,  532. 
"  Industrial  Commission,  XIII,  p.  48. 


are  the  Standard  Oil  Company/  the  International  Harvester 
Company,^  the  Pittsburg  Plate  Glass  Company,'  and  the  meat- 
packing companies.^ 

The  ability  of  the  trusts  to  charge  excessive  prices  and  to 
capitalize  the  increased  ^xning  power  thus  created  must  be  y^ 
ascribed  in  many  cases  to'lhe  protection  afforded  by  the  tariff. 
Had  it  not  been  for  the  prohibitions,  partial  or  complete,  imposed 
by  the  tariff,  foreign  competition  would  have  operated  to  prevent 
prices  in  this  country  from  being  raised  above  the  foreign  cost 
plus  transportation  expenses.  And  if  prices  could  not  be  much 
advanced  as  the  result  of  the  elimination  of  domestic  competi- 
tion, there  would  have  been  no  justification,  even  on  the  earning 
power  basis,  for  the  issuance  of  a  mass  of  watered  securities, 
unless  indeed  the  trust  should  prove  to  be  much  more  efficient 
than  the  producing  units  that  it  displaced.^  /Ahe  protective 
tanff  thus  promoted  the  trust  movement  by  offering  to  the 
manufacturers  prospects  of  large  profits — ^profits  large  enough  to 
induce  them  to  overcome  their  inherent  repugnance  to  relin- 
quishing their  independence  and  the  control  of  their  own  busi- 
ness— and  by  offering  to  the  investing  public  a  chance  to  share  in 
the  speculative  gains.*  // 

However,  the  influence  of  the  tariff  must  not  be  exaggerated. 

Trusts  were  formed  in  industries  not  protected  by  tariff  duties  as 

well  as  in  industries  enjoying  such  artificial  support;  and  they 

were  formed  in  industries  in  which  such  protection  was  purely 

ncxninal  as  well  as  in  industries  in  which  the  trusts  required 

'  If  we  compare  the  capitalization  of  the  Standard  with  the  actual  invest- 
ment (exclusive  of  the  reinvestment  of  surplus  earnings)  it  was  overcapital- 
ized in  1906;  if  we  compare  it  with  the  cost  of  reproducing  the  property  on 
that  date  it  was  distinctly  undercapitalized.  See  Brief  for  the  United  States 
(no.  725),  vol.  II,  pp.  4-5- 

•  See  p.  236. 

'  Industrial  Commission,  XIII,  pp.  227,  241. 

^Report  of  the  Commissioner  of  Corporations  on  the  Beef  Industry, 

PP-  39-40. 

•  This  matter  is  discussed  in  ch.  19. 

•  The  tariflf  also  furthered  the  trust  movement  by  intensifying  competition 
m  the  protected  industries.  On  this  point  see  Bullock,  Quarterly  Journal  of 
Economics,  15,  pp.  208-209. 


assistance  were  they  to  compete  successfully  with  foreign 
manufacturers./Clearly  the  tariflF  can  not  be  held  responsible 
for  the  formation  of  trusts  in  those  industries-in  which  the  eflS- 
dency  of  American  manufacturers  was  so  pronounced  that 
domestic  prices  remained  lower  than  foreign  even  after  the 
elimination  of  competition  in  this  country,  fitht  truth  is  that 
the  causes  of  the  growth  of  monopoly  are  numerous  and  complex, 
and  the  most  that  can  be  said  with  respect  to  the  tariff  is  that 
in  many  instances  it  was  a  contributing  factor  of  considerable 

So  much  for  conclusions  grounded  on  experience.  Let  us  next 
consider  on  the  basis  of  general  reasoning  what  is  the  probable 
effect  of  monopoly  on  prices. 

According  to  the  theory  of  monopoly  price,  a  monopolized 
article  will  be  sold  at  the  price  that  yields  the  maximum  net 
profits.^  If  a  high  price  be  charged,  the  profit  per  unit  will  be 
large,  but  the  volume  flf  sales  will  be  small,  unless  the  demand  be 
inelastic.  Jf ,  on  the  other  hand,  a  low  price  be  chargedJJifLprofit 
per  unit  will  be  small,  but  the  volume  of  sales  will  bejaige,  pro- 
viding the  demand_is  elastic.  Under  these  circumstances  the 
monopolist  (trust)  may  be  expected  in  the  absence  of  restraining 
factors — of  which  more  later — to  hit  upon,  through  a  process  of 
trial  and  error,  that  price  which  brings  in  the  greatest  net  revenue. 
What  that  price  will  be  will  depend,  as  stated  before,  on  the 
conditions  of  demand.  In  general,  a  high  price  wUlJbcjnoi^ 
profitable  if  the  demand  is  inelastic,  that  is,  if  it  persists  despite 
high  prices;  and  a  low  price  will  be  more  profitable  if  the  demand 
is  elastic,  that  is,  if  it  increases  as  the  price  falls,  and  decreases  as 
the  price  rises.  What  will  be  the  most  profitable  price  will 
depend  also  on  the  conditions  of  cost.  If  the  cost  of  producticm 
rises  as  the  voliune  of  output  increases,  the  tendency  will  be  to 
pursue  a  high  price  policy,  since  increased  business  occasions  a 
greater  expense  per  unit.  This  will  be  particidarly  true,  if  at  the 
same  time  the  demand  is  inelastic.    If,  however,  the  cost  of  pro- 

'  For  a  more  extended  discussion  of  the  theory  of  monopoly  price,  see 
Taussig,  Principles  of  Economics  (191 1),  I,  ch.  15;  Ely,  Outlines  of  Eco- 
nomics (1916),  pp.  200-207;  and  Ely,  Monopolies  and  Trusts,  ch.  3. 



duction  falls  as  the  volume  of  output  increases,  the  tendency 
will  be  to  pursue  a  low  price  policy,  since  enlarged  business  ^ 
causes  a  reduced  expense  per  unit.  If  the  demand  be  elastic,  the  \ 
monopolist  will  be  almost  certain  to  charge  comparatively  low 
prices.  If,  finally,  the  cost  be  neither  increasing  nor  decreasing, 
but  constant,  the  calculations  of  the  monopolist  will  be  more 
simple;  he  will  adjust  his  output  with  reference  solely  to  the 
demand,  choosing  that  price  that  promises  the  maximum  net 

Such  being  the  principles  underlying  the  determination  of 
monopoly  price,  how  does  a  monopoly  price  compare  with  a   \^ 
ccHnpetitive  price?    There  is  ji:eneral  agreement  among  leading 
economists  that  a  monopoly  price  is  likely  to  be  higher  than  a 
competitive  price.^   The  explanation  of  this  tendency  lies  in  the 
control  exercised  by  the  monopoly  over  the  supply.     Under 
competitive  conditions  the  price  of  an  article  tends  to  hover 
about  the  cost  of  production  (including  in  cost  a  normal  profit). 
If  the  price  rises  above  the  cost,  the  supply  increases  and  the 
price  falls  again,  provided  there  has  been  no  change  meanwhile  in 
the  conditions  of  demand;  and  if  the  price  falls  below  the  cost, 
the  supply  decreases  and  the  price  rises  again.   Under  monopoly 
conditions,  however,  the  price  of  an  article  does  not  tend  to  hover  . 
about  the  cost  of  production,  but  at  a  point  somewhat  above;  / 
for  the  monopolist  can  limit  the  supply,  and  by  this  means  pre-/ 
vent  prices  from  faUing  to  a  level  determined  by  cost.    To  be 
sure,  the  monopoly  in  restricting  the  supply  and  advancing  the 
price  is  confronted  with  the  possibility  of  a  considerable  decline 
m  its  sales;  and  it  may  find  it  advantageous  to  pursue  a  moder- 
ate policy.    But  thf,  competitive  producer  charging  a  high  price 
will  not  only  s^er  a  reduction  in  his  sales  through  the  decline  in 
the  demand,  but  also  through  a  diversidi^  of  his  busine^  to  his 

^  Taussig,  Principles  of  Economics  (1911;,  I,  p.  206;  Ely,  Monopolies  and 
Trusts  (1906),  p.  119;  Fisher,  Elementary  Principles  of  Economics  (191 2), 
p.  330;  Carver,  Principles  of  Political  Economy  (1919),  p.  352;  Bullock, 
Introduction  to  the  Study  of  Economics  (1908),  p.  337;  Fetter,  The  Principles 
of  Economics  (1910),  p.  330;  Seligman,  Principles  of  Economics  (1910), 
p.  258;  Seager,  Introduction  to  Economics  (1905),  p.  498. 


competitors.  To  a  monopoly,  assuming  it  to  be  effective  and  to 
have  competition  well  under  control,  there  is  one  check  on  high 
prices,  whereas  to  a  competitive  producer  there  are  two.  It  is  of 
course  evident  that  an  individual  competitive  producer  can 
restrict  his  own  supply,  and  thus  raise  prices  somewhat,  yet  he 
can  not  ordinarily  by  such  means  enhance  his  profits.  The 
benefits  of  the  high  price  go  to  his  fellow  producers  who  continue 
production  in  undiminished  volume;  and  are  temporary  at  best, 
since  the  high  prices  stimulate  the  output.  To  the  consuming 
public  this  is  precisely  the  merit  of  the  competitive  system,  that 
under  it  a  particular  producer  can  not  augment  his  profits 
by  restricting  the  output.  A  monopoly,  on  the  other  hand, 
may  achieve  its  success,  not  by  increasing,  but  by  limiting 

The  monopoly  price,  it  should  be  observed,  may  be  no  higher, 
and  may  even  be  lower,  than  the  competitive  price,  if  the  mo- 
nopoly is  more  efficient  than  alternative  forms  of  business  organi- 
zation. The  monopoly  under  these  conditions  would  still  charge 
the  price  that  was  the  most  profitable  to  it,  but  this  price  might 
be  below  the  cost  of  production  (including  a  normal  profit)  to 
smaller  concerns.  Whether  this  is  to  be  anticipated  so  far  as 
industrial  monopolies  (trusts)  are  concerned  will  receive  con- 
sideration later.* 

If  these  are  the  principles  upon  which  monopolies  proceed, 
how  does  it  happen  that  it  is  difficult  to  show  in  convincing 
fashion  the  whole  effect  of  trusts  on  prices?  The  explanation  is 
that  there  are  many  considerations  that  have  made  it  seem 
advisable  for  the  trusts  to  exercise  restraint  in  their  price  policy, 
with  the  result  that  they  have  not  advanced  prices  as  much  as 
might  be  anticipated  did  they  feel  entirely  secure  in  their  mo- 
nopolistic position. 

1  (i)  First  of  all  there  is  the  potential  competition  of  new 
concerns.  If  the  trust  is  too  greedy  for  profits  and  raises  prices 
unreasonably,  there  are  attracted  to  the  industry  a  host  of 
new  companies  anxious  to  participate  in  the  unusual*  returns. 
During  the  early  life  of  the  trust  movement  the  individual  trusts 

*  See  ch.  19. 


frequently  tried  to  do  away  with  this  competition  by  the  resort 
to  unfoir  competitive  tactics,  notably  local  price  cutting,  railroad 
discriminations,  and  exclusive  dealing  requirements;  and  en- 
deavored through  threats  of  employing  such  practices  against 
all  would-be  competitors  to  prevent  new  concerns  from  ever 
getting  started.  Such  methods  resulted  in  the  destruction  of 
many  enterprises,  and  may  be  said  to  have  been  reasonably 
successful  in  many  instances.  Yet  they  were  not  always  used, 
and  even  when  used  they  were  by  no  means  always  effective. 
In  many  industries  the  trusts  found  themselves  overcome  by  the 
new  competition,  and  their  control  of  the  trade  speedily  dwindled 
away.  The  lesson  was  salutary,  and  the  trusts  that  survived 
pursued  a  more  farsighted  policy.  They  commonly  came  to  see 
the  inadvisability  of  charging  prices  so  high  that  new  concerns 
were  tempted  to  rush  headlong  into  the  business  hoping  to  get 
their  capital  back  in  a  few  years,  for  such  a  policy  led  to  serious 
overproduction  and  to  an  inevitable  decline  in  prices.  They 
charged  instead  more  moderate  prices,  albeit  somewhat  above  a 
competitive  figure.  It  thus  appears  that  potential  (and  actual) 
competition  has  operated  on  occasion  to  prevent  the  trusts  from 
following  their  natural  course.  Yet  potential  competition  is  not 
a  satisfactory  or  adequate  regulator  of  trust  profits,  because  the 
strength  of  many  trusts  is  based  on  the  possession  of  some  special 
advantage  in  competition,  such  as  the  ownership  of  patents  or  a 
limited  natural  resource.  When  this  is  the  case,  there  are  effec- 
tive obstacles,  perhaps  insuperable  ones,  in  the  way  of  competi- 
tion, and  the  trust  need  exercise  little  restraint,  unless  there  be 
danger  of  hostile  legislation  of  one  kind  or  another.  Again,  in 
some  industries,  though  competition  is  not  artificially  restrained, 
it  may  be  backward  because  of  the  large  capital  needed  to  embark 
in  the  undertaking,  or  because  of  the  length  of  time  required  to 
construct  the  plant  and  to  establish  the  business.  In  such 
industries  the  possibility  of  reduced  prices  on  the  emergence  of 
competition  may  prevent  potential  competition  from  becoming 
actual  competition,  and  may  enable  the  trust  to  charge  prices 
that  are  considerably  above  the  cost  of  production,  and  thus  to 
secure  a  monopoly  profit. 



\  \  /  (2)  The  possibility  of  substituting  for  the  monopolized 
/article  another  one  that  is  being  sold  at  a  more  reasonable  price  is 
a  factor  that  may  induce  trusts  to  refrain  from  charging  exorbi- 
tant prices.  If  the  price  of  kerosene  be  abnormally  hi^,  people 
will  use  gas  and  electricity;  and  no  doubt  the  competition  oi 
these  fuels  has  operated  to  keep  down  the  price  of  kerosene,  and 
thus  outwardly  to  lend  support  to  the  argument  that  the  oil 
trust  has  reduced  its  price.  If  the  price  of  sugar  be  excessive, 
erstwhile  consumers  will  adopt  such  substitutes  as  glucose. 
In  industry,  manufacturers  may  employ  as  fuel  soft  coal,  hard 
coal  (the  steam  sizes),  gas,  oil,  and  the  like;  and  they  may  even 
bum  no  fuel,  but  run  their  machinery  with  electricity  generated 
by  water  power  hundreds  of  miles  away.  In  homes,  wood  is  also 
a  possible  substitute.  Steel,  lumber,  concrete,  stone,  and  brick 
all  compete  with  one  another  to  some  extent  in  building.  Rubber 
shoes  (or  soles)  may  be  substituted  for  leather  shoes;  and  enam- 
eled ware  and  tin  may  be  used  in  place  of  aluminum  cooking 
utensils.  Even  the  tin  can  trust  must  bear  in  mind  that  an 
excessive  price  for  tin  cans  may  hamper  the  fruit  preserving 
industry  in  its  competition  with  the  fruit  drying  industry.  How- 
ever, the  possibility  of  substitution  is  not  always  present,  or,  if 
present,  may  exercise  comparatively  little  influence.  What,  it 
may  be  asked,  are  effective  substitutes  for  watches,  cameras, 
cigarettes,  salt,  grain  binders,  and  steel  rails?  Moreover,  when 
the  competition  of  substitutes  is  effective,  there  is  an  incentive  to 
secure  control  over  the  allied  industry,  which  explains  the  en- 
trance of  Standard  Oil  capitalists  into  the  gas  industry,  and  the 
attempted  domination  of  the  substitutes  for  meat  by  the  leading 
meat-packers.  The  conclusion  would  appear  to  be  justified  that 
while  collateral  competition  may  impose  some  limitations  on 
monopoly  power,  it  by  no  means  insures  that  the  monopolized 
article  will  be  sold  at  a  reasonable  price,  and  it  is  thus  a  safe- 
guard of  limited  effectiveness. 

(3)  A  particular  trust  may  be  restrained  by  the  fact  that  its 
sales  are  made  in  large  part  to  another  trust,  or  possibly  to  an 
important  combination.  For  example,  a  copper  trust,  if  obliged 
to  sell  to  a  brass  trust,  might  meet  with  determined  resistance  to 




exorbitant  prices;  the  latter  by  withholding  purchases  mij^t  well 
break  the  market.  A  tin  can  trust  in  such  fashion  might  secure 
relief  on  its  purchases  of  tin  plate.  However,  it  rarely  happens 
that  one  trust  is  the  principal  market  for  another.  The  shoe 
machinery  trust  and  the  cash  register  trust  buy  large  quantities 
of  steel,  yet  their  purchases  constitute  such  a  small  percentage  of 
the  total  that  such  action  as  they  individually  might  take  to 
reduce  the  price  charged  for  steel  by  a  steel  trust  would  be  of 
little  consequence.  So  it  would  be  with  the  purchase  of  cotton 
yam  by  the  thread  trust,  and  of  steel  pipes  and  tubes  by  the 
oil  trust.  It  is  precisely  because  of  their  limited  control  over 
the  affairs  of  other  trusts  that  some  of  them  make  for  themselves 
the  articles  which  they  would  otherwise  have  to  secure  from 
their  fellow  trusts.  This  explains  in  large  measure  why  the 
oil  trust,  the  tobacco  trust,  and  many  others  make  their  own 
tin  cans  instead  of  buying  them  from  the  American  Can  Com- 
pany. We  must  conclude  that  the  balance  of  power  among 
trusts,  though  it  protects  the  consumer  in  part,  is  not  an  effective 
bar  against  excessive  prices  of  trust  made  goods. 

(4)  The  disinclination  to  arouse  public  opinion  also  plays  its 
part,  and  no  doubt  a  considerable  one.  The  people,  if  sufficiently 
antagonized,  will  repeal  favoring  legislation  or  pass  restrictive 
laws.  Many  trusts  have  been  protected  against  foreign  competi- 
tion by  protective  duties;  but  the  trust  that  uses  these  duties  as 
an  excuse  for  unreasonable  prices  fzjces  the  danger  of  a  removal 
of  its  protection.  Other  trusts  are  founded  on  patent  monopolies 
permitted  by  the  government;  but  the  patent  laws  can  be  re- 
vised, if  it  seems  desirable.  But  not  only  may  favoring  legisla- 
tion be  repealed,  but  regulative  laws  may  be  passed.  At  the 
present  time  (1919)  biUs  to  regulate  the  meat  industry  are  re- 
ceiving the  serious  consideration  of  Congress;  and  the  suggestion 
at  one  time  or  another  has  been  soberly  made  that  the  oil  and  the 
steel  industries  (and  others)  are  essentially  public  service  corpo- 
rations, and  should  be  regulated  as  such.  Indeed,  a  considerable 
body  of  public  opinion  favors  the  regulation  of  the  prices  of  all 
monopolized  articles.  Another  considerable  group  advocates 
public  ownership  of  natural  resources,  a  step  that  would  be  of 


particular  concern  to  some  ten  important  trusts.  In  view  of 
1  these  contingencies  it  is  likely  that  the  trust  managers,  with 
I  their  fingers  on  the  public  pulse  and  with  an  eye  to  the  continued 
I  enjoyment  of  their  strategic  position,  will  refrain  from  pressing 
I  their  advantage  to  the  fullest;  and  their  prices  will  not  in  the 
futiu*e,  as  they  have  not  in  the  past,  conform  rigidly  to  the 
,  ^  principles  of  monopoly  price  as  above  laid  down. 

^  (5)  A  trust,  it  has  been  said,  may  be  influenced  by  a  sense  of 
{equity  and  reasonableness;  it  may  desire  to  have  the  good  will  of 
the  dealers  and  the  public,  and  thus  may  not  take  advantage  of 
their  necessities.  The  steel  trust,  for  example,  fixed  the  price  of 
steel  rails  at  $28  per  ton,  and  charged  no  more  than  this  during 
periods  of  prosperity,  when  market  conditions  would  have 
enabled  it  to  get  more.  In  this  particular  instance  the  price  was 
fixed  at  a  very  high  level  to  begin  with,  hence  this  is  hardly  an 
illustration  of  equitable  dealing.  Yet  it  is  conceivable  that  a 
trust,  even  though  created  in  an  anti-social  spirit,  might  ccane 
under  the  leadership  of  managers  of  a  different  sort, — ^managers 
desirous  of  charging  only  a  fair  price.  Conceivable  though  it  be,  it 
is  unlikely,  since  even  under  the  competitive  r6gime  it  is  regarded 
as  proper  to  charge  what  the  public  is  willing  to  pay;  and  why 
should  a  monopoly  take  any  less?  The  fact  would  appear  to  be 
that  in  so  far  as  trusts  (or  their  managers)  adopt  a  spirit  of 
reasonableness  it  is  because  such  a  course  is  the  one  best  calcu- 
lated to  secure  for  them  the  good  will  of  the  trade  and  of  the 
consuming  public,  and  thus  to  prolong  their  enjoyment  of 
moderate  monopoly  profits. 

(6)  The  trust  because  of  inert  management  may  not  try  to 
secure  the  maximum  net  profit.  Unwilling  to  meet  the  attacks  of 
competitors  and  of  politicians,  it  may  hesitate  to  exploit  the 
public,  and  may  rest  satisfied  with  a  moderate  profit,  perhaps 
little,  if  any,  above  a  competitive  level.  Under  these  circimi- 
stances,  the  control  of  the  business  might  soon  be  sought  by  more 
aggressive  and  forceful  interests,  alive  to  their  opportunities,  and 
able  to  make  handsome  returns  even  after  paying  a  good  price 
for  the  property.  Yet  the  owners  of  the  business,  notwithstand- 
ing the  inertness  of  the  management,  might  refuse  to  sell,  hence 


there  can  be  no  certainty  that  each  trust  will  be  managed  along 
the  lines  offering  the  maximum  profit. 

(7)  A  trust  may  fail  to  charge  the  price,  that  produces  the 
greatest  net  revenue  through  sheer  inability  to  ascertain  what 
that  price  is.  Among  the  unknown  factors  in  the  problem  are 
the  amount  of  the  demand  at  various  prices  and  the  extent  to 
which  the  cost  of  production  will  increase  or  decUne  as  the  out- 
put varies.  The  matter  is  compUcated  because  the  demand 
schedule,  even  if  it  could  be  worked  out  for  any  given  date, 
changes  from  time  to  time.  The  demand  for  any  particular 
article  depends  on  the  state  of  business,  on  the  mood  of  the  con- 
suming pubUc,  and  on  the  distribution  of  purchasing  power 
among  the  community.  If  business  is  good,  the  demand  will 
normaUy  be  great,  and  a  high  price  may  yield  the  maximum  net 
profit;  and  conversely,  when  a  period  of  depression  sets  in.  If 
the  public  is  extravagantly  minded,  as  at  present  (1919),  a 
proportionately  large  outlay  will  be  made  for  consumer's  goods, 
and  their  monopoly  price  could  well  be  high;  and  conversely  for 
those  articles  that  are  in  demand  when  thrift  is  in  vogue.  Again, 
if  there  occurs  a  marked  change  in  the  distribution  of  the  com- 
munity's purchasing  power,  so  that  the  bondholders  and  the 
salaried  classes  have  less  and  the  working  people  more,  the 
trusts  that  produce  articles  desired  by  those  of  increased  pur- 
chasing power  could  raise  their  prices,  whereas  those  trusts  that 
produced  articles  desired  by  individuals  of  reduced  purchasing 
power  might  be  compeUed  to  reduce  their  prices.  There  may  be 
other  matters  that  complicate  the  problem;  but  enough  has  been 
said  to  show  that  at  best  all  that  a  trust  can  hope  to  do  is  to 
approximate  the  most  profitable  price.  Though  the  price  that  it 
charges  will  doubtless  be  somewhat,  perhaps  considerably, 
above  the  competitive  price,  it  will  not  be  fixed,  we  may  premise, 
as  the  result  of  a  mathematical  formula  at  the  exact  point  that 
would  actually  prove 'to  be  the  most  remunerative. 

The  foregoing  considerations  make  it  evident  that  the  price 
policy  of  the  trusts  has  been  less  grasping  than  might  have  been 
expected  of  an  agency  formed  largely  for  the  express  purpose  of 
suppressing  competition.    They  also  demonstrate  that  though 


there  are  certain  forces  at  work  to  safeguard  the  public  interest, 
i    these  forces  are  not  adequate  of  themselves,  since  they  do  not 
prevent  the  trusts  from  charging  prices  higher  than  the  public 
would  pay  under  competitive  conditions,  assmning  that  industry 
is  as  economicaUy  conducted  under  the  latter  state  as  under  the 
\  first.    As  to  legalizing  trusts  in  the  hope  of  satisfactorily  regu- 
lating them  and  their  prices,  it  will  be  shown  in  chapter  XX 
^that  price  regulation  is  a  problem  of  the  first  magnitude  and 
me  whose  successful  solution  is  problematical. 




In  this  chapter  it  is  proposed  to  indicate  by  a  study  of  in- 
dividual trust  promotions  the  importance  of  promoters'  profits 
as  a  cause  contributing  to  the  formation  of  trusts. 

The  function  and  work  of  the  promoter  have  been  well 
described  elsewhere/  and  need  not  be  dwelt  upon  here  in  any 
detail.  Briefly,  in  a  typical  trust  promotion  the  promoter  secured 
options  on  the  plants  that  were  to  be  combined;  arranged, 
usually  through  an  underwriting  syndicate,  for  the  raising  of  the 
necessary  funds;  organized  a  corporation  to  acquire  the  plants; 
and  provided  for  the  transfer  of  the  plants  (or  securities)  to  the 

In  effecting  a  trust  promotion  the  promoter  had  first  to 
obtain  options  on  the  properties  (or  the  securities),  otherwise 
the  owners  would  in  all  likelihood  have  advanced  their  purchase 
price  as  it  became  evident  that  the  trust  was  to  be  formed.  The 
promoter,  to  be  sure,  might  have  bought  all  the  properties  for 
cash,  but  this  would  have  involved  a  great  deal  of  risk,  and 
would,  moreover,  have  been  diflScult  to  finance.  In  fact,  it  was 
rarely  done.  Second,  he  had  to  secure  financial  backing,  since 
the  trust  required  working  capital  (it  did  not  ordinarily  acquire 
the  working  capital  of  the  constituent  companies),  and  since 
some  owners  would  almost  certainly  demand  cash  for  their 
plants,  refusing  to  accept  securities,  the  value  of  which  was  more 
or  less  problematical.^    Generally  speaking,  however,  the  amount 

^See  Meade,  Trust  Finance,  chs.  4-6;  Haney,  Business  Organization 
and  Combination,  ch.  18;  and  Lough,  Corporation  Fiiumce,  chs.  12-14. 

*  Thb  cash  the  promoter  usually  secured  through  the  sale  of  stock  to  an 
underwriting  syndicate.  Because  of  the  risk  that  the  stock  could  not  be  dis- 
posed of  at  a  profit,  the  syndicate  was  wont  to  insist  on  a  commission  in  the 
form  of  bonus  stock. 



of  cash  required  to  buy  out  the  manufacturers  was  comparatively 
small.  Ordinarily  the  promoter  offered  them  at  least  one  share 
of  preferred  stock  and  one  of  common  stock  in  lieu  of  $100  in 
cash;  ^  and  tempted  by  the  profits  that  were  anticipated  for  the 
trust,  the  manufacturers  commonly  agreed  to  take  the  stock. 
Had  they  not  been  willing  to  take  stock  very  few  trusts  would 
have  been  formed.  The  promoters  would  have  been  unable  to 
supply  the  large  amount  of  cash  that  would  have  been  required,^ 
and  the  public  would  have  hesitated  to  buy  securities  that  were 
unacceptable  to  the  manufacturers,  who  were  acquainted  with 
the  industry  and  its  prospects.  Third,  the  promoter  had  to 
organize  a  new  company  to  acquire  the  plants  or  the  stocks  of 
the  underlying  companies,  unless,  indeed,  one  of  the  existing 
companies  was  used  for  this  purpose.  In  any  event  the  capital- 
ization of  the  new  (or  reorganized)  company  was  likely  to  be 
determined  by  the  promoter,  with  the  advice  of  the  financiers. 
Finally,  he  had  to  arrange  for  the  transfer  of  the  properties  or 
securities  of  the  separate  companies  to  the  newly-organized 
corporation  in  exchange  for  its  securities  or  for  cash,  or  both. 
Sometimes  the  corporation  gave  to  the  promoter  all  or  part  of 
its  stock  in  return  for  an  agreement  upon  the  part  of  the  pro- 
moter to  deliver  to  it  the  plants  or  control  of  the  companies 
owning  the  plants.  In  that  case  the  size  of  the  promoter's 
profit  depended  on  how  favorable  a  bargain  he  was  able  to 
drive  with  the  separate  manufacturers.  At  other  times  the 
corporation  offered  to  exchange  its  securities  for  those  of  the 
constituent  companies  at  a  definite  ratio,  the  promoter  taking 
his  profit  perhaps  in  the  form  of  a  stock  commission.  In  either 
event  there  would  probably  be  issues  of  stock  to  the  financiers 
or  bankers  who  agreed  to  supply  the  requisite  funds. 

It  is  clear,  therefore,  that  the  organization  of  a  trust  usually 
involved  large  issues  of  stock  to  a  great  variety  of  individuals. 
These  included:  (i)  the  promoters  who  purchased  or  secured 

*The  preferred  stock  usually  represented  the  value  of  the  plants;  the 
conunon  stock  the  anticipation  of  nsonopoly  gains. 

'  The  financiers  would  have  balked,  of  course,  at  putting  up  cash  to  finance 
a  proposition  that  the  manufacturers  mistrusted. 


options  on  the  properties,  and  who  devised  the  financial  plan; 
(2)  the  financiers  who  raised,  or  agreed  to  raise,  the  necessary 
funds;  (3)  the  lawyers  who  incorporated  the  company,  and 
attended  to  the  legal  aspects  of  the  promotion;  (4)  the  manu- 
facturers who  were  generally  unwilling  to  sell  unless  they  re- 
ceived stock  much  in  excess  of  the  value  of  their  properties; 
and  (5)  the  public,  which  was  expected  to  buy  the  stock,  and 
which  at  times  had  to  be  tempted  by  an  offer  of  common  stock 
as  a  bonus.  It  frequently  happened  that  the  promoter  was  also 
a  financier,  that  is,  was  a  member  of  the  underwriting  syndicate, 
and  less  frequently  perhaps  he  was  also  a  manufacturer.  His 
profits,  therefore,  were  often  a  composite.  Because  of  the 
difficulty,  if  not  impossibility,  of  determining  in  individual 
cases  of  trust  promotion  to  what  extent  the  profits  of  the  pro- 
moter were  a  reward  for  true  promotion  services,  to  what  extent 
'a  reward  for  financial  services,  and  to  what  extent  for  legal  and 
miscellaneous  services,  we  shall  in  general  in  this  chapter  use  the 
term  promoters'  profits  to  indicate  the  profits  made  by  the 
promoters,  financiers,  and  lawyers,  but  not  including  those 
additional  profits  that  were  realized  by  these  groups  when  they 
were  also  owners  of  stock  in  the  companies  that  were  combined. 
There  can  be  no  doubt  that  the  promoter,  when  he  was  also  a 
manufacturer,  may  have  been  animated  fully  as  much  by  a 
desire  to  secure  profits  in  the  r61e  of  manufacturer  as  in  the  role 
of  promoter,  yet  this  motive  was  by  no  means  always  present, 
since  many  trusts  were  promoted  by  "outsiders."  Under  this 
use  of  the  term  promoters'  profits,  it  will  be  observed,  we  are 
underestimating  rather  than  exaggerating  the  importance  of 
promoters'  profits  as  an  inducement  toward  the  formation  of 
trusts.  However,  it  will  still  be  true  in  many  instances  that 
the  inducement  remained  sufficiently  great  to  give  a  distinct 
fillip  to  the  trust  movement. 

The  largest  trust  and  the  one  in  which  promoters'  profits 
figured  most  prominently  is  the  United  States  Steel  Corporation. 
This  company  represented  a  union  under  the  holding  company 
plan  of  a  group  of  concerns,  some  of  which  were  merely  combi- 
nations and  others  of  which  were  trusts.    The  capitalization  of 


the  Steel  Corporation  thus  allowed  for  the  remuneration  of  two 
sets  of  promoters,  those  that  had  organized  the  constituent 
companies  of  the  Corporation,  and  those  that  organized  the 
Corporation  itself.    The  two  cases  will  be  described  separately. 

Some  idea  of  the  profits  secured  by  the  promoters  of  the  steel 
combinations  and  trusts  of  1898  to  1900  may  be  gained  by  an 
examination  of  the  table  on  page  287,  showing  the  amount  of 
stock  representing  promotion  charges,  the  value  of  this  stock 
based  on  average  market  quotations  during  1899  to  1900,  and 
the  percentage  that  this  stock  was  of  the  total  issue.*  It  should 
be  noted  that  the  amount  of  stock  left  in  the  hands  of  the 
promoters  was  not  all  profit,  since  usually  the  promoters  had  to 
give  a  part  of  this  stock  (or  cash)  to  meet  certain  expenses 
incurred  in  the  promotion.  In  general,  however,  such  expenses 
were  small. 

Even  a  cursory  examination  of  the  table  makes  it  clear  that" 
the  promoters'  profits  were  enormous.  The  promoters  of  the 
eight  concerns  for  which  data  were  available  retained  as  their 
reward  for  promotion  services  some  $63,000,000  of  stock,  or 
over  one-tenth  of  the  total  issued  stock  (if  we  excluded  the 
Carnegie  Company,  in  the  organization  of  which  there  were  no 
promoters*  profits,  the  ratio  would  be  more  than  one-eighth). 
The  market  value  of  this  stock,  based  on  the  average  quota- 
tions during  1899  to  1900,  was  over  $28,000,000.  Its  value  based 
on  the  highest  quotations  of  the  respective  securities  during 
this  same  period  was  $40,549,188,  and  based  on  the  lowest 
quotations,  was  $19,829,959.  While  the  promoters  could  not 
have  unloaded  all  of  their  stock  at  the  highest  quotation,  it  is 
improbable  that  they  would  have  sold  at  the  mininum  figure 
for  the  two  year  period.  If  we  assume  that  the  promoters 
disposed  of  all  their  stock  prior  to  1901,  the  pn^ts  of  promo- 
tion were  at  least  $20,000,000;  ^  if  we  assume  that  they  did  not 

^  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry,  part 
I,  pp.  126, 129, 133, 136, 138, 140, 144, 14s,  170, 176-179.  Referred  to  here- 
after in  this  chapter  as  Report  on  the  Steel  Industry. 

-These  are  pure  profits  of  promotion;  they  do  not  include  such  indirect 
profits  as  the  promoters  might  have  made  through  the  sale  of  securities  given 




Common  stock 

Value  based 

on  average 

market  price 

iSgQ-igcx)  * 

Ratio  of 
stock  repre- 
charges  to 
issued  cap- 
ital stock 

Xatioiial  Tube  Co 







4,456,811  » 




$  9,744,000 

II. 9 

American  Steel  and  Wire  Co. . 

American  Tin  Plate  Co 

American  Bridge  Co 

National  Steel  Co 

American  Steel  Hoop  Co 

Federal  Steel  Co 


American  Sheet  Steel  Co 

Shelby  Steel  Tube  Co 

Carneffie  Co 




10. 1  * 

dispose  of  all  of  their  stock — we  know  that  they  did  not — their 
possible  profits  were  much  greater,  since  upon  the  organization 
of  the  Steel  Corporation  they  were  allowed  to  exchange  their  old 
stock  for  a  greater  amount  of  stock  in  the  Corporation.'  In  any 
event  the  profits  were  suflSciently  large  to  tempt  daring  pro- 
moters to  take  advantage  of  an  opportunity  to  "get  rich  quick," 

to  them  in  return  for  cash  or  in  return  for  the  securities  that  they  held  in  the 
companies  that  were  combined. 

^  In  the  case  of  companies  not  organized  until  late  in  1899  or  early  in  1900 
quotations  are  from  the  date  of  organization  to  the  close  of  1900. 

'  Includes  $857,192  of  preferred  stock. 

*  Amount  unknown,  but  probably  large.  See  Report  on  the  Steel  Industry, 
part  I,  pp.  140,  178. 

*  Amount  unknown,  but  apparently  small.   See  ibid.,  pp.  144, 179. 
*See  ibid.,  p.  179. 

*  13.5  per  cent  if  we  did  not  include  the  capital  stock  ($160,000,000)  of 
the  Carnegie  Company. 

^  Except  in  the  case  of  the  American  Steel  Hoop  Company  and  the  Ameri- 
can Sheet  Steel  Company. 


whether  or  no  the  product  of  their  daring  subsequently  demon- 
strated its  fitness  to  survive  in  a  business  world  that  is  harassed 
under  normal  conditions  by  the  pressure  of  new  capital  seeking 

The  promoters'  profits  realized  in  these  early  combinations 
and  trusts  in  the  steel  industry,  large  as  they  were,  were  eclipsed 
by  those  obtained  by  the  promoters  of  the  United  States  Steel 
Corporation.  The  syndicate  which  undertook  to  secure  a  major- 
ity of  the  stock  of  the  eight  companies  originally  acquired  by  the 
Corporation  incurred  cash  expenses  of  $28,000,000,  of  which 
amount  $25,000,000  went  to  the  Corporation  for  working  capi- 
tal. In  return  for  this  outlay  and  its  underwriting  services  the 
syndicate  was  given  by  the  Corporation  a  total  of  1,299,975 
shares  of  stock  (half  preferred  and  half  common),  having  a 
par  value  of  $129,997,500.  On  this  stock  the  syndicate  re- 
alized about  $90,500,000.^  Deducting  the  cash  expenditures 
($28,000,000),  it  is  evident  that  the  syndicate  made  a  profit  of 
$62,500,000.  Of  this  amount  one-fifth  went  to  the  firm  of  J.  V. 
Morgan  and  Company,  the  syndicate  managers,  for  their  serv- 
ices; and  the  balance  ($50,000,000)  was  distributed  among  the 
members  of  the  underwriting  syndicate,  including  the  Morgan 
firm.^  It  is  hardly  necessary  to  point  out  that  the  possibility  of 
making  such  large  profits  constitutes,  in  itself,  a  distinct  induce- 
ment to  the  formation  of  trusts. 

This  huge  compensation  to  the  syndicate  was,  according  to  the 
Bureau  of  Corporations,  greatly  in  excess  of  a  reasonable  pay- 
ment; and  particularly  so  in  view  of  the  reserved  right  of  the 
syndicate  managers  to  abandon  the  transaction  at  their  own 
discretion.^  The  syndicate  merely  undertook  to  acquire  the 
securities  of  various  steel  companies;  it  did  not  guarantee  to  do 
so.  It  should  be  noted,  moreover,  that  while  the  syndicate 
subscribers  stood  liable  to  raise  $200,000,000  upon  request  of 
the  s)aidicate  managers,  it  was  generally  understood  that  they 
would  not  be  called  upon  for  more  than  $25,000,000  in  cash; 

*  Report  on  the  Steel  Industry,  part  I,  p.  244. 

•  Ibid.,  pp.  244,  248. 
•Ibid.jpp.  245-246. 


and  this,  in  fact,  was  aU  that  .they  contributed,  except  some 
$3,000,000  for  organization  expenses.  The  Bureau  of  Corpora- 
tions, in  fact,  alleged  that  this  ''large  nominal  obligation  of  the 
syndicate  subscribers  to  the  S3mdicate  managers  apparently 
was  determined  upon  in  part  with  a  view  to  disarming 
subsequent  criticism  of  the  enormous  compensation  which  it 

From  the  point  of  view  of  the  public  it  is  clear  that  it  would 
be  necessary  to  charge  excessive  prices  for  iron  and  steel  prod- 
ucts, if  dividends  were  to  be  paid  on  the  inordinate  amount  of 
stock  given  to  the  promoters  of  the  Corporation,  not  to  mention 
dividends  on  that  part  of  the  stock  of  the  Corporation  given  to 
the  promoters  of  the  constituent  companies  (or  their  successors) 
in  retiun  for  the  stock  held  by  them.  The  matter  is  important, 
since  some  $150,000,000  of  the  stock  of  the  Corporation,  or 
nearly  one-seventh  of  its  total  stock,  was  issued,  directly  or 
indirectly,  to  promoters  and  underwriters.* 

The  American  Tobacco  Company  (the  cigarette  trust)  was 
organized  in  1890  as  a  consolidation  of  five  of  the  leading  manu- 
facturers of  cigarettes.  Since  the  manufacturers  were  them- 
selves the  organizers,  there  were  no  promoters'  profits  as  we 
have  employed  the  term.  At  that  early  date  it  was  not  common 
for  trusts  to  be  formed  by  "promoters";  and  the  number  of 
manufacturers  being  so  few,  it  was  comparatively  easy  to  arrive 
at  an  agreement.  There  was,  however,  a  very  marked  over- 
capitalization in  the  organization  of  the  trust.  The  capitaliza- 
tion of  the  company  was  $25,000,000,  of  which  $15,000,000  was 
common  stock  and  $10,000,000  preferred.  TJie  value  of  the 
assets  acquired  did  not  exceed  $14,400,000.^  The  capitalization 
thus  exceeded  the  assets  (including  good  will)  by  at  least  $10,- 
600,000.  The  establishment  of  a  high  degree  of  monopoly 
control,  however,  made  it  possible  for  the  company  to  earn  ap- 
proximately 20  per  cent  on  its  common  stock,  water  and  all. 
Enormous  profits  were  thus  realized  by  the  promoters  of  this 

*  Report  on  the  Steel  Industry,  part  T,  pp.  245-246. 
» Sec  Report  on  the  Steel  Industry,  part  I,  p.  251. 
'  Cf.  p.  271. 


company,  but  the  profits  were  realized  as  manufacturers  rather 
than  as  professional  promoters. 

The  Continental  Tobacco  Company  (the  plug  tobacco  trust) 
was  organized  in  1898.  This  company  was  very  heavily  over- 
capitalized, but,  as  with  the  American  Tobacco  Company, 
nearly  all  of  its  securities  went  to  the  owners  of  the  eleven  plants 
that  were  combined.  Inasmuch  as  five  of  these  eleven  plants 
belonged  to  the  American  Tobacco  Company,  and  inasmuch  as 
this  concern  had  been  conducting  a  severe  competitive  campaign 
to  force  its  competitors  into  a  combination,  there  was  less  occa- 
sion than  usual  for  resort  to  a  promoter,  who  should  undertake 
the  task  of  inducing  the  separate  owners  to  combine  their  in- 

Though  promoters*  profits  did  not  figure  prominently  in  the 
organization  of  the  plug  tobacco  trust,  they  were  nevertheless 
present.  The  firm  of  Moore  and  Schley,  well-known  bankers 
and  brokers,  secured  cash  options  on  four  important  concerns, 
producing  among  them  nearly  one-quarter  of  the  output  that 
went  into  the  trust  in  1898.^  The  purchase  price  stipulated  in 
the  option  agreements  was  $8,477,000.  The  bankers  (Moore 
and  Schley)  also  raised  $2,751,400  in  cash,  to  enable  the  Conti- 
nental Company  to  take  care  of  its  promotion  and  other  ex- 
penses.^ For  these  properties  and  the  cash  the  Continental 
Company  gave  $25,025,000  in  stock  (one-half  preferred  and 
one-half  common),  and  $365,500  in  cash.*  The  bankers  in  turn 
transferred  $19,522,200  of  the  stock  and  all  of  the  cash  to  the 
owners  of  the  four  plants;  and  retained  as  their  pay  $5,502,800 
in  stock,  half  preferred  and  half  common.  While  the  bankers 
doubtless  incurred  a  few  incidental  expenses,  it  is  substantially 
correct  to  say  that  their  profits  on  the  transaction  were  the 
realizable  value  of  this  stock  minus'  the  cash  ($2,751,400)  that 

1  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  p.  99;  part  II,  p.  107. 

*  Report  on  the  Tobacco  Industry,  part  I,  pp.  101-102. 

■  Ibid.,  part  II,  p.  107.  The  cash  payment  represented  interest  on  the 
purchase  price  during  the  period  that  intervened  between  the  signing  of 
the  option  and  the  transfer  of  the  plants  to  the  Continental  Company. 


they  raised.  The  market  value  of  this  stock  during  the  three 
years  of  the  life  of  the  company — a  reorganization  was  eflFected 
in  1901 — ^based  on  the  minimum  and  maximum  quotations 
ranged  between  $2^76,260  and  $5,370,732.  On  this  basis,  had 
they  sold  at  the  minimum  quotations  (which  is  quite  unlikely) 
they  would  have  sustained  a  loss  of  $275,140;  had  they  sold  at 
the  maximum  quotations  (which  is  equally  unlikely)  their 
profits  would  have  been  $2,619,332.^  On  the  other  hand,  if 
they  refrained  from  selling  during  1899-1901  they  would  have 
been  in  a  position  to  participate  in  the  reorganization  of  1901 
(when  the  American  Tobacco  Company  and  the  Continental 
Tobacco  Company  were  combined),  in  which  event  new  oppor- 
timities  for  profit  would  have  presented  themselves.  It  is 
probable,  therefore,  that  the  bankers  made  a  handsome  profit; 
but  it  is  certain  that  the  possibility  of  realizing  a  profit  for  the 
promoters  as  such  had  Uttle  to  do  with  the  organization  of  the 
plug  tobacco  trust. 

The  syndicate  of  bankers  and  manufacturers  that  secured  an 
option  on  the  Liggett  aCnd  Myers  Tobacco  Company,  the  largest 
plug  tobacco  concern  outside  of  the  trust,  also  made  a  large 
profit  through  its  sale  to  the  Continental  Tobacco  Company;  in 
fact,  it  acquired  the  Liggett  concern  largely  for  that  purpose.  Yet 
since  this  syndicate,  though  composed  in  large  measure  of  finan- 
cial and  banking  interests,  was  the  actual  owner  of  the  properties 
that  it  conveyed  to  the  trust,  its  gains  may  not  be  regarded  as 
true  promoters*  profits,  but  rather  as  profits  received  as  an 
owner  of  property  that  was  indispensable  to  the  trust. 

In  addition  to  the  cigarette  and  plug  tobacco  trusts  a  number 
of  other  companies  with  monopolistic  aspirations  were  formed  in 
the  tobacco  industry.  These  include  the  American  SnuflF  Com- 
pany (1900);  the  American  Cigar  Company  (1901);  the  Consoli- 
dated Tobacco  Company  (1901) ;  and  the  new  American  Tobacco 
Company  (1904).  In  not  one  of  these  combinations,  however, 
does  it  appear  that  any  stock  went  to  promoters  or  bankers  for 
prcHnotion  services.  The  absence  of  promoters'  profits  in  the 
organization  of  the  first  two  of  these  combinations  was  probably 
1  N^^ting  dividends  and  carrying  chaiges  in  each  case. 


due  to  the  fact  that  the  concerns  that  were  combined  were  so  few 
in  number  that  the  owners  were  able  to  come  together  and  effect 
an  agreement  among  themselves;  and  in  the  last  two  to  the  fact 
that  these  combinations  represented  largely  a  rearrangement  of 
securities,  no  new  concerns  being  immediately  brought  in.  On 
the  whole,  therefore,  it  is  correct  to  say  that  promoters'  profits 
have  had  surprisingly  little  to  do  with  the  formation  of  trusts 
in  the  tobacco  industry. 

The  American  Can  Company  (the  tin  can  trust)  was  organized 
in  1901  with  an  issued  capital  stock  of  $82,466,600,  half  preferred 
and  half  conmaon.  Of  this  stock  $78,000,000^  equally  divided 
between  preferred  and  common  stock,  was  given  to  the  promot- 
ers in  exchange  for  some  ninety-five  plants  on  which  the  promot- 
ers held  options  and  for  $7,000,000  in  cash  raised  by  them.^  The 
promoters  paid  for  the  plants  about  $23,500,000,  either  in  cash 
or  in  securities  practically  the  equivalent  of  cash.^  Thus,  when 
the  manufacturers  took  stock — ^most  of  them  did,  for  otherwise 
the  combination  could  not  have  been  formed — they  received  one 
share  of  preferred  and  one  share  of  conmion  for  each  $100  of  the 
purchase  price.  On  the  assiunption  that  all  of  the  manufacturers 
took  stock,  the  promoters  gave  some  $47,000,000  in  stock  for 
the  plants,  and  had  $31,000,000  left.^  Of  this  amount  about 
$14,000,000  might  properly  be  regarded  as  payment  for  the 
$7,000,000  in  cash  turned  over  to  the  American  Can  Company 
as  working  capital.  Their  actual  profits,  therefore,  were  the 
realizable  value  of  $17,000,000  in  stock,  half  preferred  and  half 
conmion.  How  much  the  promoters  actually  realized  there  is 
no  means  of  knowing,  but  the  market  value  of  this  $17,000,000 
in  stock  during  April  to  August,  1901,  was  seldom  below  eight 

*  Petitioner's  Summary  of  Evidence  in  United  States  v.  American  Can 
Company  (no.  40),  pp.  73"76. 

'  230  Fed.  Rep.  859. 

'  On  the  assumption  that  one  share  of  preferred  and  one  share  of  common 
were  equivalent  to  $100  in  cash  it  was  immaterial  to  the  promoters  whether 
the  manufacturers  took  cash  or  stock.  If  the  manufacturers  did  not  want 
stock  the  promoters  had  that  much  more  cash  to  raise,  but  they  retained  that 
much  more  stock.  Their  profits  would  not  be  affected  so  long  as  the  under- 
lying assimiption  held  good. 


and  one-half  million  dollars,  and  at  times  was  considerably 
above.  It  is  not  intended  to  say  that  the  promoters  could  have 
dispK>sed  of  their  stock  during  these  months  and  have  realized 
$8,500,000;  for  the  sale  of  some  40  per  cent  of  the  total  stock  of 
the  company  during  a  comparatively  short  period  would  doubt- 
less have  led  to  a  decline  in  its  market  value.  Yet  it  is  likely 
that  around  $8,000,000. could  have  been  realized;  and  for  this 
sum  practically  all  of  the  plants  could  have  been  duplicated.^ 
Whether  the  promoters  in  fact  realized  as  much  as  $8,000,000 
depends  on  how  much  confidence  they  had  in  the  creature  of 
their  creation.  The  greater  their  confidence,  the  less  their 
profitSj^since  by  the  fall  of  1901  the  bubble  was  pricked.  Tin  can 
prices,  which  had  steadily  advanced  in  the  months  following  the 
organization  of  the  American  Can  Company,  soon  took  a  decided 
drop,  and  with  them  went  stock  market  quotations. 

The  International  Harvester  Company  (the  harvester  trust) 
was  organized  in  1902  as  a  consolidation  of  the  five  principal 
manufacturers  of  harvesting  machines.  Its  promotion  was 
notable  for  the  comparative  absence  of  promoters'  profits  or 
even  of  overcapitalization.  The  total  capitalization  of  the 
International  Harvester  Company  at  its  organization  was 
$120,000,000,  all  common  stock.  This  stock  was  allotted  as 
follows:  ^ 

For  physical  property  of  the  five  concerns  (including  bills  re- 
ceivable of  the  MUwaukee  Company)  * $56^1,055 

For  bills  receivable  and  cash  of  the  other  four  manufacturing 

interests 49,851,803 

For  cash  ($10,000,000)  raised  by  the  bankers 10,000,000 

For  organization  expenses 749)999 

For  commission  to  the  bankers 2,957,143 

Total  stock  issue $120,000,000 

Of  the  total  capital  stock  nearly  half  ($56,441,055)  was  issued 

*  230  Fed.  Rep.  870-871. 

*  Unless  indeed  they  held  their  stock  for  a  number  of  years. 

'  Calctilated  from  a  table  in  the  Report  of  the  Commissioner  of  Corpora- 
tions on  the  International  Harvester  Company,  p.  86. 

*  The  Milwaukee  Harvester  Company  was  purchased  as  a  going  concern. 


in  return  for  the  physical  properties  of  the  five  companies  (in- 
cluding bills  receivable  in  the  case  of  the  Milwaukee  company). 
The  value  of  these  properties  as  appraised  by  the  organizers  was 
approximately  $67,000,000;  as  determined  by  the  Bureau  of 
Corporations  only  about  $49,000,000.^  Neither  of  these  valua- 
tions, however,  made  any  allowance  for  good  will.  It  is  clear, 
therefore,  that  the  purchase  price  was  substantially  reasonable. 
Another  block  of  the  stock  ($49,851,803)  went  to  the  McCor- 
mick,  Deering,  Piano,  and  Warder  interests  in  exchange  for  cash 
subscriptions.  In  considerable  measure  these  cash  subscriptions 
took  the  form  of  an  assignment  to  the  International  Harvester 
Company  of  bills  receivable  guaranteed  by  the  vendor  com- 
panies; but  a  considerable  amount  of  cash  was  raised  in  addition.* 
The  bills  receivable  being  guaranteed,  there  was  no  stock  infla- 
tion on  this  score. 

The  balance  of  the  stock  ($13,707,142)  went  to  J.  P.  Morgan 
and  Company,  the  bankers.  This  sum,  it  should  be  observed, 
does  not  include  the  $3,148,197  of  stock  given  to  the  bankers  in 
exchange  for  the  Milwaukee  Harvester  Company,  which  was 
acquired  by  the  bankers  on  behalf  of  the  combination,  and  for 
which  the  bankers  received  stock  equal  to  the  actual  value  of 
the  company  as  a  going  concern.  What  service  did  the  bankers 
perform  in  return  for  this  large  issue  of  stock?  In  the  first  place, 
they  agreed  to  subscribe  to  $10,000,000  of  the  stock  of  the 
company  at  par.^  In  the  second  place,  they  incurred  certain 
expenses  in  the  formation  of  the  company.  These  expenses, 
amounting  to  $749,999,  were  covered  by  a  specific  allotment  of 
stock,  which  is  included  in  the  $13,707,000.  The  balance  of  the 
stock  received  by  them  ($2,957,143)  represented  therefore  their 
commission  as  bankers.  Was  this  commission  excessive?  The 
Bureau  of  Corporations  maintained  that  it  was.    It  pointed  out 

» Cf .  p.  236. 

'  Report  on  the  International  Harvester  Company,  p.  77.  Companies 
selling  harvesting  machines  have  unusually  laige  bills  receivable  because  of 
the  necessity  of  granting  long  terms  of  credit. 

'  They  originally  agreed  to  raise  $19^00,000,  but  the  amount  was  later 
reduced  to  $10,000,000. 


that  since  this  payment  to  the  bankers  did  not  correspond  to  any 
property  conveyed  or  expenses  incurred,  it  could  be  justified 
from  the  point  of  view  of  the  company  only  on  the  ground  of 
merger  value — ^which  did  not  materialize  in  the  early  life  of  the 
company — or  on  the  ground  of  the  value  of  an  alUance  with  the 
firm  of  J.  P.  Morgan  and  Company.^  Even  on  this  score,  that  is, 
disr^arding  the  welfare  of  the  public,  it  held  the  payment  to  be 
excessive.   As  bearing  on  this  matter  it  should  be  borne  in  mind 
that  the  risk  of  the  bankers  was  comparatively  sUght.    The 
bankers  acted  largely  as  the  agents  of  a  very  small  group  of 
manufacturers,  who  were  anxious  to  effect  a  combination,  and 
who  were  in  a  position  to  deUver  the  requisite  properties,  since 
the  stock  of  the  companies  was  closely  held.     Moreover,  the 
bankers  assumed  no  obligations  as  underwriters,  since  payment 
for  the  properties  was  taken  by  the  manufacturers  in  the  form  of 
stock.    The  main  contribution  of  the  bankers,  therefore,  outside 
of  the  purchase  of  the  Milwaukee  Company  and  the  organiza- 
tion of  the  Harvester  Company  (for  which  services  they  were 
specifically  remimerated)  was  the  raising  of  $10,000,000.    For 
this  cash  they  did  not,  as  was  conmion  in  trust  promotions, 
receive  $200  in  stock  for  each  $100  in  cash;  they  merely  re- 
ceived stock  dollar  for  dollar.    The  vital  question,  therefore,  is: 
what  was  the  value  of  the  stock  for  which  they  subscribed  at 
par?    Was  it  anticipated  that  the  organization  of  the  trust 
would  result  in  increased  profits?   In  that  case  their  commission 
was  undoubtedly  excessive.     On  the  other  hand,  was  there 
danger  that  the  stock  would  fall  below  par?   In  that  event  their 
commission  may  have  been  distinctly  moderate.    The  Report  of 
the  Bureau  of  Corporations  did  not  discuss  this  question,  and  the 
lack  of  quotations  for  the  company's  securities  during  the  early 
years  makes  it  difficult  to  return  a  satisfactory  answer.    The 
fact  is,  however,  that  the  profits  of  the  Harvester  Company  dur- 
mg  its  early  year?  were  rather  low,  and  its  dividend  payments 
distinctly  low.    It  would  appear,  therefore,  that  the  bankers  did 
take  considerable  risk.   It  is  conceivable  that  the  company  might 
have  been  able  to  avoid  the  issuance  of  the  $3,000,000  of  stock 
^  Report  on  the  International  Harvester  Company,  pp.  127-128. 


that  represented  the  bankers'  commissions  by  the  saleof  $10,000,- 
000  of  stock  at  par  to  the  public  (which  ordinarily  receives  no 
commission),  but  in  view  of  the  fact  that  a  great  mass  of  un- 
digested trust  securities  was  then  hanging  over  the  market  this 
is  by  no  means  certain.  In  any  event,  it  is  clear  that  the  pro- 
moters' profits  in  the  formation  of  the  harvester  trust  were  dis- 
tinctly small  as  compared  with  the  other  trusts  of  its  size  that 
were  organized  during  the  same  period. 

The  profits  of  the  promoters  of  a  number  of  other  trusts  will  be 
briefly  reviewed.  Unless  stated  to  the  contrary  it  should  be 
understood  in  each  instance  that  these  profits  are  subject  to 
some  deductions  for  promotion  expenses.  They  do  not  ordina- 
rily, therefore,  represent  net  profits. 

The  promoter  of  the  starch  trust  (1890)  secured  options  on  a 
number  of  plants  and  raised  $1,545,750.  In  return  he  received 
securities  (bonds  and  stocks)  that  had  an  average  market  value 
during  the  first  two  years  of  the  company's  life  of  $2,268427. 
His  nominal  profits,  therefore,  were  $722,677.^ 

The  promoters  of  the  rubber  boot  and  shoe  trust  (1892)  re- 
ceived $1,300,000  of  common  stock,  which  at  the  average  quota- 
tions during  the  first  year  had  a  value  of  approximately  $560,000. 
Out  of  this  sum  the  promoters  had  to  .meet  organization  expenses, 
but  unlike  many  promotions  their  risk  was  small,  since  the 
amount  of  stock  they  received  did  not  depend  on  their  skill  as 
bargainers,  but  was  a  definite  percentage  (5  per  cent)  of  the 
total  issue  of  stock.  ^ 

The  promoters  and  financial  backers  of  the  glucose  trust  (1897) 
raised  $4,500,000  in  cash;  and  were  given  approximately  $14,- 
500,000  in  securities,  or  over  38  per  cent  of  the  total  issue.  The 
average  market  value  of  this  stock  was  $9,000,000;  and  the 
paper  profit  was  therefore  $4,500,000.' 

The  promoters  of  the  malt  trust  (1897)  received  $500,000  in 
preferred  stock  and  $7,750,000  in  common  stock  (or  nearly  one- 
third  of  the  total  capitalization)  to  cover  the  expenses  of  promo- 

'  Dewing,  Corporate  Promotions  and  Reorganizations,  pp.  53-55. 
*  Industrial  Commission,  XIII,  pp.  48-49. 
'  Dewing,  op.  cit.,  p.  82, 


tion.  These  securities  were  worth  nearly  $3 ,400,000  at  their  max- 
imum quotations,  but  they  declined  rapidly  and  as  a  result  most 
of  the  promoters  made  but  sUght  profits.^ 

The  promoters  of  the  silver-ware  trust  (1898)  received  only 
$600,000  of  conunon  stock  (equal  to  3  per  cent  of  the  total  capital- 
lization),  and  out  of  this  they  had  to  meet  the  expenses  of  organ- 
ization.^ The  market  value  of  this  stock  during  the  first  year  was 
only  about  $100,000.  It  is  dear,  therefore,  that  the  profit  was 

The  promoters  of  the  asphalt  trust  (1899)  took  their  pay  in 
considerable  measure  through  the  sale  to  the  trust  at  fancy  prices 
of  a  company  which  they  organized  for  that  particular  purpose.^ 
The  properties  of  this  company  cost  them  $618,000;  and  they 
sold  them  to  the  trust  of  their  creation  for  $3,670,000  in  bonds, 
or  more  than  five  times  their  cost.  In  addition,  as  manufac- 
turers they  received  bonds  exceeding  by  nearly  $2,500,000  the 
value  of  the  properties  transferred  to  the  trust.  Their  profits  as 
promoters  were  thus  the  realizable  value  of  some  $3,000,000  of 
bonds.  The  average  price  at  which  these  bonds  first  sold  was 
around  $93,  but  the  promoters  could  not  have  sold  all  of  their 
bonds  at  this  price  without  spoiling  the  market.  There  can  be 
little  doubt,  however,  that  their  profits  were  handsome. 

The  promoter  of  the  bicycle  trust  (1899)  after  effecting  the  req- 
uisite transfer  of  securities  for  properties  retained  as  his  com- 
pensation $2,000,000  in  debenture  bonds,  $2,600,000  in  preferred 
stock,  and  $6,700,000  in  conunon  stock,  or  a  total  of  $11,300,000 
(equal  to  31  per  cent  of  the  company's  capitalization).  This 
does  not  include  such  profits  or  losses  as  might  have  been  made 
by  the  imderwriting  syndicate  which  supplied  the  requisite 
funds  in  return  for  bonds  at  92^^  cents  on  the  dollar.  Notwith- 
standing the  fact  that  most  of  the  manufacturers  attested 
their  faith  in  the  company  by  taking  securities,  the  promoter, 
because  of  the  sudden  collapse  of  the  industry,  realized  only  a 
small  profit.^ 

The  promoters  and  bankers  that  organized  the  cotton  yam 

*  Dewing,  op.  dt.,  pp.  276,  279.  '  Dewing,  op.  dt.,  pp.  428-430. 

*  Industrial  Commission,  I,  p.  1068.     *  Ibid.,  pp.  253-254. 


trust  (1899)  received  nearly  all  the  common  stock  ($5,000,000). 
The  consolidation  did  not  prove  successfiJ,  and  as  a  result  the 
promoters  realized  no  profit  at  all.^  Substantially  the  same  was 
true  of  the  cotton  duck  trust,  organized  in  1901.  The  promoters 
of  this  trust  after  meeting  the  initial  organization  expenses  had 
left  $6,250,000  of  common  stock,  of  a  value  of  at  least  $1,500,000. 
Having  confidence  in  the  company  they  not  only  retained  this 
stock,  but  bought  more;  and  in  the  end  they  sustained  heavy 

In  the  promotion  of  the  foregoing  trusts  promoters'  profits 
figured  more  or  less  prominently.  In  the  organization  of  a  niun* 
ber  of  other  trusts,  however,  promoters'  profits  were  insignificant 
or  even  entirely  absent.  This  appears  to  be  true  of  the  oil,  pow- 
der,^ sugar,  cash  register,  cordage,  leather,  aluminum,  wall  paper, 
shoe  machinery,  news  print  paper,  glass  table  ware,  and  salt 
trusts.  In  the  formation  of  some  of  these  trusts,  notably  the 
sugar  trust,  large  profits  were  made  by  the  organizers,  but  these 
profits  came  to  them  as  the  owners  of  stock  rather  than  as  pro- 
moters. In  the  formation  of  others,  notably  the  cordage  and 
leather  trusts,  there  was  some  imderwriting  of  securities,  but  this 
was  a  detail  in  the  formation  of  the  trust  rather  than  an  important 
contributing  cause.  How,  it  may  be  asked,  was  it  possible  to 
organize  this  large  number  of  important  trusts  without  offering 
large  rewards  to  the  promoter,  who  is  supposed  to  perform  a  nec- 
essary function?  The  answer  is  two-fold:  (i)  some  trusts  became 
such  through  the  expansion  of  a  concern  already  in  the  field, 
rather  than  through  a  combination  at  one  time  of  most  of  the 
plants  in  the  country.  For  instance,  the  Standard  Oil  Company, 
organized  in  1870  to  take  over  the  business  of  the  partnership  to 
which  it  succeeded,  bought  first  this  property  and  then  that, 
financing  these  purchases  partly  out  of  its  enormous  earnings, 
partly  out  of  cash  subscribed  by  the  stockholders,  and  partly  by 
an  exchange  of  securities.  Obviously  no  trust  promoter  was 

*  Dewing,  op.  dt,  p.  313. 
*Ibid.,  p.  341. 

'  There  were  laige  promoters'  profits  in  the  reorganization  of  this  trust  io 
1902;  but  none  in  the  original  organization. 


quired  to  create  a  trust  developed  in  this  fashion.  (2)  Some 
trusts,  the  news  print  paper  trust,  for  example,  were  established 
with  the  aid  of  promoters  who  took  no  pay  for  their  services; 
Their  willingness  to  perform  the  service — they  incurred  no  risk — 
may  have  been  because  they  anticipated  that  the  gain  to  them 
as  manufacturers  would  be  sufficient;  or  it  may  have  been  be- 
cause they  r^arded  the  task  as  an  opportunity  to  be  of  service 
to  their  trade,  and  the  honor  as  a  sufficient  reward. 

As  a  result  of  the  foregoing  study  the  conclusion  would  appear 
to  be  abimdantly  justified  that  the  prospect  of  securing  promo- 
tion profits  has  contributed  markedly  toward  the  formation  of 
numerous  trusts.  It  played  a  lesser  part,  however,  than  the  hope 
of  achieving  monopoly  prices.  A  number  of  trusts,  as  we  have 
seen,  were  organized  without  promoters'  profits;  whereas  few, 
if  any,  were  organized  without  the  anticipation  at  least  of 
monopoly  gains. 




The  law  relating  to  combinations  and  trusts  is  of  two  kinds — 

first,  common  law,  and  second,  statute  law.  Statute  law,  in 
turn,  may  be  either  that  of  the  states  or  of  the  federal  government. 
Though  we  are  concerned  in  this  treatise  mainly  with  the  devel- 
opmentof  statute  law  (and  particularly  of  federal  law),  a  brief 
consideration  of  the  common  law  decisions  of  the  courts  will  be 
advantageous,  especially  since  the  Supreme  Court  in  the  Standard 
Oil  case  held  that  the  term  "restraint  of  trade"  as  used  in  the 
Sherman  Act  should  be  construed  as  declaratory  of  the  common 
law  on  this  subject.*  Common  law,  it  may  be  said,  imports  a  sys- 
tem of  imwritten  law,  not  evidenced  by  statute.  Its  soiurces  are 
found  in  the  usages,  habits,  manners,  and  customs  of  a  people;  its 
seat,  in  the  breast  of  the  judges  who  are  its  expounders.'  Com- 
mon law  yields  to  statute  law,  where  such  exists,  yet  imtil  the 
late  eighties  there  were  very  few  state  statutes  dealing  with  in- 
dustrial combinations  and  trusts,  and  imtil  the  passage  of  the 
Sherman  Act  in  1890  there  was  no  federal  statute.  It  was  there- 
fore only  to  be  expected  that  a  considerable  body  of  common 
law  doctrine  had  developed  with  respect  to  restraints  of  trade 
and  combinations  of  one  type  or  another. 
The  rule  was  early  established  in  English  law  that  contracts  or 
'  agreements  in  restraint  of  trade  were  void,  and  therefore  non- 

*  On  this  topic  see  the  Report  of  the  Commissioner  of  Corporations  on 
Trust  Laws  and  Unfair  Competition,  chs.  2,  7;  and  Goodnow,  Trade  Com- 
binations at  Common  Law,  Political  Science  Quarterly,  12,  pp.  212-245. 
The  author  has  made  liberal  use  of  these  works  in  preparing  this  chapter. 

'  Cf.  remarks  of  Senator  Hoar  in  Cong.  Record,  April  8,  1890,  p.  3152. 

'  Judicial  and  Statutory  Definitions  of  Words  and  Phrases,  second  series, 
p.  810. 



enforceable.  The  courts  refused  to  recognize  the  validity  of  any 
restraint  of  trade,  no  matter  how  limited  its  scope.  The  cases 
which  came  before  them  in  the  early  daj^  involved  principally 
the  right  of  an  individual,  in  disposing  of  his  business,  to  agree 
not  to  reenter  that  same  business.  The  courts  took  the  position 
that  in  the  interest  oi  trade  an  individual  should  not  be  allowed 
to  contract  that  he  would  stay  out  of  the  business  in  which  he 
had  been  engaged.  Subsequently,  however,  this  rule  was  relaxed. 
In  MUchdt  v.  Reynolds  (1711)  an  English  court  held  that  while 
general  restraints  of  trade  were  void,  a  restraint  limited  to  a  par-  I  / 
ticular  place  might  under  certain  circimistances  be  enforceable.^  ^ 
Though  American  courts,  following  Mitchell  v.  Reynolds,  have  in 
many  cases  held  that  an  agreement  involving  a  restraint  covering 
an  entire  state  is  void  as  a  general  restraint,^  still  the  cases  are 
numerous  in  which  American  courts  have  upheld  particular 
restraints  when  the  restraint  was  regarded  as  reasonable.' 
The  modem  rule  was  well  stated  in  Hubbard  v.  Miller,  "  If,  con- 
sidered with  reference  to  the  situation,  business  and  objects  of 
the  parties,  and  in  the  light  of  ail  the  surrounding  circumstances 
with  reference  to  which  the  contract  was  made,  the  restraint 
contracted  for  appears  to  have  been  for  a  just  and  honest  pur- 
pose, for  the  protection  of  the  legitimate  interests  of  the  party 
in  whose  favor  it  is  imposed,  reasonable  as  between  them  and  not 
q)ecially  injurious  to  the  public,  the  restraint  will  be  held  valid. "  * 
Gradually,  therefore,  the  principle  became  established  at  common 
law  that  agreements  connected  with  the  sale  of  a  business  were 
not  necessarily  void,  even  though  thereby  a  restraint  of  trade  was 
effected,  providing  the  restraint  was  reasonable  in  character. 

» I  P.  Wms.  181  (1711). 

*  Sec  Lawrence  v,  Kidder,  10  Barbour  (New  York)  641  (1851);  Taylor  v. 
Blanchaid,  95  Massachusetts  370  (1866);  Western  Woodenware  Association 
V.  Staikey,  84  Michigan  76  (1890). 

*See  Bowser  v.  Bliss  *et  al.,  7  Blackford  (Indiana)  344  (1845);  Duffy  0. 
Sbockey,  11  Indiana  70  (1858);  Beal  v.  Chase,  31  Michigan  490  (1875); 
Whitney  v.  Slay  ton,  40  Maine  224  (1885);  Diamond  Match  Company  v. 
Roeber,  106  New  York  473  (1887);  Robinson  v.  Suburban  Brick  Company, 
127  Fed.  Rep.  804  (1904). 

^  27  Michigan  19  (1873). 


The  next  class  of  cases  to  be  described  (we  are  following  here 
the  classification  adopted  in  the  report  of  the  Commissioner  of 
/  Corporations  on  Trust  Laws)  is  that  relating  to  agreements 
among  competitors  to  restrict  competition  or  to  form  a  combin- 
ation, but  not  including  such  restriction  of  competition  as  re- 
sults from  the  formation  of  a  trust.  The  latter  will  be  described 

Agreements  to  restrain  competition,  as  pointed  out  in  the 
chapter  on  Pools,  may  be  of  various  sorts.  They  may  be  in- 
formal, as,  for  example,  the  gentlemen's  agreements,  or  they 
may  be  quite  formal,  with  provisions  for  penalties  in  the  event 
of  a  failure  to  observe  the  agreement.  The  agreements  may^ 
look  toward  the  control  of  the  supply,  the  limitation  of  the  out- 
put, the  fixing  of  prices,  the  pooling  of  profits,  or  the  division  of 
territory.  Whatever  their  form,  they  were  void  imder  the 
common  law  when  they  imdiJy  restrained  competition,  and 
were  therefore  detrimental  to  the  public  interest.  No  rule  for 
the  determination  of  what  constituted  undue  restraint  under 
the  common  law  was  laid  down;  the  common  law  doctrine  was 
that  each  case  should  be  settled  in  the  light  of  the  facts. 

The  state  of  the  common  law  can  best  be  indicated  by  dting 
a  few  representative  cases,  some  of  them  illustrating  invalid 
agreements,  and  some  valid  agreements. 

Invalid  AgreetnetUs  ^ 

India  Bagging  Association  v.  B,  Kock  and  Company?  Ei^t 
firms  had  formed  an  association  for  the  sale  of  India  bagging, 

*  See  also  Craft  r.  McConoughy,  79  Illinois  346,  (1875);  Amot  v.  The 
Pittslon  and  Elmira  Coal  Company,  68  New  York  558  (1877);  Santa  Clara 
Valley  Mill  and  Lumber  Company  v,  Hayes,  76  California  387  U888); 
Anderson  r.  Jett,  89  Kentucky  375  (1889);  Samuels  v.  Oliver,  130  IlHnois  73 
(1889);  Emery  v.  Ohio  Candle  Company,  47  Ohio  State  320  (1890);  Strait  v. 
National  Harrow  Company,  18  New  York  Supplement  224  (1891);  The 
Texas  Standard  Oil  Company  t».  Adoue,  83  Texas  650  (1892);  Oliver  v.  Gil- 
more,  52  Fed.  Rep.  562  (1892);  Bohn  Manufacturing  Company  v.  Hollis, 

*  14  Louisiana  Annual  Reports  168  (1859). 


the  bagging  to  remain  the  property  of  the  individual  members. 
Each  firm  agreed  not  to  sell  any  bagging  for  a  period  of  three 
months,  except  with  the  consent  of  the  majority,  imder  a 
penalty  of  $10  for  every  bale  sold.  The  manager  of  the  associa- 
tion broug^suit  against  one  of  the  members  for  having  sold 
740  bales  of  bagging,  in  contravention  of  the  articles  of  the 
association.  The  Court  held  that  the  agreement  entered  into 
was  palpably  and  unequivocally  a  combination  in  restraint  of 
trade,  and  to  enhance  the  price  of  an  article  of  primary  necessity 
to  cotton  planters;  and  that  it  was  contrary  to  public  order,  and 
might  not  therefore  be  enforced  in  a  court  of  justice. 

Morris  Run  Coal  Company  v.  Barclay  Coal  Company.^  Five 
coal  companies  in  Pennsylvania  had  entered  into  an  arrange- 
ment in  New  York  by  which  they  agreed  to  divide  among 
themselves  in  certain  proportions  the  market  for  the  bitimiinous 
coal  produced  in  the  two  coal  regions  controlled  by  them;  and  to 
appoint  a  committee  to  take  charge  of  their  business.  The 
committee  was  empowered  to  adjust  the  prices  of  coal  in  the 
different  markets,  and  the  rates  of  freight,  and  to  enter  into 
agreements  with  the  anthracite  coal  companies.  Provision  was 
made  for  the  mining  of  coal  and  its  delivery  in  the  different 
markets  at  such  times  and  to  such  parties  as  the  committee 
might  direct,  and  for  the  sale  of  the  coal  through  a  general  sales 
agent  to  be  appointed  by  the  committee,  and  to  be  stationed  in 
New  York  state.  However,  the  companies  were  allowed  to  sell 
the  coal  themselves,  provided  they  did  not  exceed  the  propor- 
tion allotted  to  them,  and  provided  they  sold  at  the  prices  fixed 
by  the  conmiittee.  In  an  action  on  a  draft,  given  in  furtherance 
of  the  agreement,  the  Court  held  that  the  contract  was  Void 
under  the  conmion  law,  being  in  restraint  of  trade  and  against 
public  policy.    It  was  also  held  to  be  void  on  the  groimd  that 

54  Minnesota  223  (1893);  Nester  v.  Continental  Brewing  Company,  161 
Pennsylvania  State  473  (1894);  Charleston  Natuial  Gas  Company  9.  Kana- 
wha Natural  Gas,  Light  and  Fuel  Company,  58  West  Virginia  22  (1905); 
Pocahontas  Coke  Company  v,  Powhatan  Coal  and  Coke  Company,  60  West 
Viigfaua  508  (igo6). 
*68  Pennsylvania  State  173  (1871). 



it  violated  a  New  York  statute  prohibiting  conspiracies  to 
commit  an  act  injurious  to  trade  or  commerce. 

The  Central  Ohio  Salt  Company  v.  Guthrie}  Practically  all 
the  salt  manufacturers  in  the  Hocking  and  Muskingum  valle3rs, 
Ohio,  had  formed  a  voluntary  association  for  the  express  piupose 
of  regulating  the  price,  and  sustaining  the  quality  of  salt.  By  the 
articles  of  association,  all  salt  manufactured  or  owned  by  the 
members  became  the  property  of  the  Central  Ohio  Salt  Company 
as  soon  was  packed  into  barrels.  The  members  of  the 
association  were  then  prohibited  from  selling  any  salt  except  by 
retail  at  the  factory,  and  except  at  prices  fixed  by  the  company. 
The  proceeds  of  sales  were  turned  over  to  the  members  in  pro- 
portion to  the  amount  of  salt  received  from  each.  For  some 
time  after  the  organization  of  the  association  the  defendant 
complied  with  the  agreement,  but  subsequently  he  refused  to 
deliver  to  the  company  the  output  of  his  furnace.  Whereupon 
the  Central  Salt  Company  brought  suit  to  enforce  the  agree- 

The  judge  pointed  out  that  while  it  was  well  settled  that  all 
contracts  in  partial  ^  restraint  of  trade  were  not  void  as  against 
public  policy,  it  was  as  fully  established  that  contracts  in 
general  ^  restraint  were  against  public  policy,  and  therefore  ab- 
solutely void.  "  Public  policy,"  -he  sftid> "  unquestionably,  favors 
competition  in  trade,  to  the  end  that  its  commodities  may  be 
afforded  to  the  consmner  as  cheaply  as  possible,  and  is  opposed 
to  monopolies,,  which  tend  to  advance  market  prices,  to  the 
injury  of  the  general  public."  The  Court  held  that  the  clear 
tendency  of  the  agreement  before  it  was  to  establish  a  monopoly, 
and  to  destroy  competition  in  trade,  and  for  that  reason,  on 
groimds  of  public  policy,  the  Court  would  not  aid  in  its  enforce- 
ment. To  say  that  competition  in  the  salt  trade  was  not  de- 
stroyed, or  that  the  price  of  the  commodity  was  not  unreason- 
ably advanced  was  no  answer;  it  was  enough  that  the  inevitable 
tendency  of  such  contracts  was  injurious  to  the  public. 
'^  Raymond  v.  Leavitt.^    The  plamtiff  had  lent  the  defendant 

»  35  Ohio  State  666  (1880).  « Italics  supplied  by  the  author. 

^  46  Michigan  447  (1881). 


SiOjOoo  for  the  purpose  of  controlling  the  wheat  market  at 
Detroit,  the  intent  being  to  force  up  prices.  The  defendant  was 
to  give  the  plaintiff  one-third  of  the  profits,  and  at  all  events  to 
rq>ay  the  principal.  The  Court  held  that  the  object  of  the 
arrangement  between  the  parties  was  to  force  a  fictitious  and 
unnatural  rise  in  the  wheat  market  for  the  express  purpose 
of  getting  the  advantage  of  dealers  and  purchasers.  The  Court 
declined  to  enforce  such  a  contract.  It  held  that  if  people  saw 
fit  to  invest  their  money  in  such  ventures,  they  must  get  it  back 
by  some  other  than  legal  measures. 

De  Witt  Wire-Cloth  Company  v.  New  Jersey  Wire-Cloth 
Company}  Five  concerns  engaged  in  the  manufacture  and 
sale  of  wire  cloth  entered  into  an  agreement  whereby,  for  the 
avowed  purpose  of  regulating  the  price  of  wire  cloth,  they  formed 
themselves  into  an  association,  agreed  that  they  would  not  sell 
below  stipulated  prices,  and  subjected  themselves  to  a  heavy 
penalty  for  the  violation  of  the  agreement.  The  Court  held  that 
the  inevitable  effect  of  this  agreement  was  to  restrict  competi- 
tion in  trade,  and  to  enhance  arbitrarily  the  price  of  a  commod- 
ity of  commerce;  and  it  was  a  settled  principle  in  the  jurispru- 
dence of  this  country  that  such  a  contract  was  repugnant  to 
public  policy,  and  thus  unlawful.  The  Court  held  that  the 
people  had  a  right  to  the  necessaries  and  conveniences  of  life  at 
a  price  determined  by  the  relation  of  supply  and  demand,  and 
the  law  forbade  any  agreement  or  combination  whereby  that 
price  was  removed  beyond  the  salutary  influence  of  legitimate 

Chapin  v.  Brown  Brothers,'^  The  grocery  men  of  Storm  Lake, 
Iowa,  finding  the  business  of  purchasing  and  retailing  butter 
burdensome,  and  believing  that  the  business  could  be  handled 
more  satisfactorily  by  one  concern  making  this  its  exclusive 
affair,  agreed  with  the  firm  of  D.  and  E.  Chapin  that  for  a  period 
of  two  years  they  would  buy  no  more  butter  or  take  none  in  trade, 
except  for  the  use  of  their  own  families.  The  Chapin  firm  in 
accordance  with  this  agreement  established  a  store  in  Storm 

*  14  New  York  Supplement  277  (1891).  '83  Iowa  156  (1891). 


Lake.  Notwithstanding  the  agreement  the  defendants  sub- 
sequently opened  a  butter  store.  The  Chapin  concern  brought 
suit  to  enforce  the  agreement. 

The  Court  refused  to  enforce  the  agreement  on  the  ground 
that  it  lacked  consideration,  and  that  it  was  against  public 
policy.  The  Court  held  that  it  plainly  tended  to  monopolize 
the  butter  trade  of  Storm  Lake,  and  to  destroy  competition 
in  the  business.  By  this  decision  an  agreement  against  public 
policy  was  declared  void,  even  though  it  applied  to  purchase 
rather  than  sale,  and  even  though  it  resulted  in  no  disadvantage 
to  the  consuming  public  generally,  the  parties  injured  being  the 
producers  of  butter. 

More  v.  Bennett}  The  law  stenographers  of  the  dty  of  Chi- 
cago had  formed  an  association,  the  object  of  which  was  to  estab- 
lish and  maintain  uniform  rates  for  stenographic  work  done  by 
the  members  of  the  association.  A  schedule  of  rates  had  been 
drawn  up,  but  it  had  not  been  observed  by  the  defendant,  so  the 
plaintiff  alleged.  The  Court,  however,  refused  to  award  dam- 
ages. It  held  that  one  of  the  leading  objects  of  the  association,  if 
not  its  leading  object^  was  to  control  the  prices  to  be  charged  by 
its  members  by  restraining  all  competition  between  them;  and 
the  agreement  was  thus  so  obnoxious  to  public  policy  as  to  render 
it  improper  for  the  courts  to  lend  their  aid  to  its  enforcement. 
This  decision  is  significant  in  that  the  Court  applied  the  same 
rules  to  agreements  regulating  the  price  of  labor  as  were  applied 
by  the  courts  generally  to  agreements  regulating  the  price  of 

The  People  of  the  State  of  New  York  v.  The  MUk  Exchanged 
The  Milk  Exchange  had  some  ninety  stockholders,  most  of 
whom  were  either  milk  dealers  in  the  city  of  New  York  or 
creamery  and  milk  commission  men  in  the  vicinity.  At  the 
first  meeting  after  its  incorporation  it  adopted  a  by-law  which 
provided  that  the  board  of  directors  should  have  power  to  fix 
the  price  at  which  milk  was  to  be  purchased  by  the  stockholders. 
The  directors  accordingly  fixed  the  price  of  milk  from  time  to 

» 140  Illiuois  69  (1892).  2 145  New  York  267  (1895). 


time,  and  the  prices  thus  established  largely  controlled  the 
market  in  New  York  and  vicinity.  The  Attorney  General  of  the 
state  brought  suit  to  have  the  charter  of  the  company  forfeited. 
The  Court  granted  the  relief  requested.  It  held  that  the  evi- 
dence justified  a  finding  that  the  Milk  Exchange  was  a  combina- 
tion inimical  to  trade,  and  thus  unlawful.  That  the  purpose  of 
the  combination  may  have  been  to  reduce  the  price  of  milk  made 
no  difference.  The  price  was  fixed  for  the  benefit  of  the  dealers, 
not  the  consumers;  and  the  logical  effect  of  the  fixing  of  prices 
by  the  combination  was  to  paralyze  the  production  and  limit  the 
supply,  and  thus  to  leave  dealers  in  a  position  to  enhance  the 
price  to  be  paid  by  consumers. 

Slaughter  v.  Thacker  Cod  and  Coke  Company.^  The  Thacker 
Coal  Company  had  been  organized  in  1895  for  the  sole  purpose  of 
acting  as  the  sales  agent  of  the  Thacker  Coal  and  Coke  Com- 
pany, and  two  other  coal  mining  concerns.  The  Thacker  Coal 
Company  entered  into  a  contract  with  the  Thacker  Coal  and 
Coke  Company,  whereby  it  agreed  to  sell  for  the  latter  at  least 
20,000  tons  of  coal  a  year  for  five  years,  at  a  commission  of  10 
cents  per  ton.  The  Coal  and  Coke  Company  agreed  to  deliver 
to  the  selling  corporation  as  much  coal  as  the  latter  could  sell, 
but  not  to  exceed  84,000  tons  a  year.  The  mining  concem  agreed 
to  pay  10  cents  per  ton  as  liquidated  damages,  should  it  fail  to 
deliver  coal  according  to  the  agreement.  Selling  prices  were 
fixed  in  the  agreement,  and  were  not  to  be  changed  without  the 
consent  of  the  three  producing  companies.  In  1896  the  Thacker 
Coal  and  Coke  Company  refused  to  deliver  any  more  coal  under 
the  contract.  The  receiver  for  the  Thacker  Coal  Company 
thereupon  brought  suit  against  the  Coal  and  Coke  Company  for 
damages.  The  Court  pointed  out  that  the  modem  rule  at 
common  law  was  that  contracts  in  restraint  of  trade  were 
enforceable,  if  they  did  not  unreasonably  restrain  trade.  But 
the  contract  before  it,  though  relating  to  only  an  insignificant 
part  of  the  coal  produced  in  the  state,  was  held  to  be  illegal  as 
tending  to  injure  the  public;  and  therefore  no  recovery  could  be 
had  on  it. 

*  55  West  Virginia  642  (1904). 


Valid  Agreements  ^ 

Skrainka  v.  Scharringhausen,^  Twenty-four  owners  and 
operators  of  stone  quarries  in  a  section  of  St.  Louis,  desiring  to 
effect  a  sale  of  their  stone  at  "uniform  prices  and  living  rates," 
had  entered  into  an  agreement,  which  was  to  last  for  six  months. 
The  agreement  made  provision  for  the  appointment  of  an  ex- 
clusive sales  agent,  who  was  to  apportion  the  output  among  the 
quarries  and  to  sell  the  stone  at  specified  prices.  The  defendant, 
who  had  violated  the  agreement,  and  thus  incurred  a  j)enalty, 
contended  that  the  agreement  was  in  restraint  of  trade,  and  not 
enforceable  at  law.  The  Court  pointed  out  that  the  old  doctrine 
of  the  common  law,  declaring  that  contracts  in  restraint  of  trade 
were  void,  was  no  longer  to  be  insisted  upon  as  rigorously  as  it 
had  been  in  the  earlier  cases.  Every  agreement  in  restraint  of 
trade  was  no  longer  illegal.  When  a  contract  injured  the  parties 
making  it,  by  diminishing  their  means  for  supporting  their 
families;  when  it  tended  to  deprive  the  public  of  the  services  of 
useful  men;  when  it  discouraged  industry,  diminished  produc- 
tion, prevented  competition,  enhanced  prices,  and  when,  being 
made  by  large  companies  or  corporations,  it  excluded  rivalry  and 
engrossed  the  markets — that  is,  tended  to  "  make  a  comer" — ^it 
was  against  the  policy  of  the  law.  But  restraints  upon  trade 
imposed  by  agreement,  under  limitations  as  to  locality,  time,  and 
persons,  were  not  necessarily  restraints  of  trade  in  the  general 
sense,  and  thus  objectionable.  Appl)dng  this  principle  to  the 
case  before  it,  the  Court  said,  "The  agreement  is  among  the 
quarrymen  of  one  district  of  one  city,  and  it  does  not  appear 
that  it  embraces  all  of  them.  There  is  no  evidence  that  it  works 
any  public  mischief,  and  the  contract  is  not  of  such  a  nature  that 
it  is  apparent  from  its  terms  that  it  tends  to  deprive  men  of 
employment,  unduly  raise  prices,  cause  a  monopoly,  or  put  an 
end  to  competition.    It  is  limited  both  as  to  time  and  place;  and 

»  See  also  Long  v.  Towl,  42  Missouri  545  (1868);  Gloucester  Isinglass  and 
Glue  Company  v.  Russia  Cement  Company,  154  Massachusetts  92  (1891); 
and  Matthews  v.  Associated  Press,  136  New  York  333  (1893). 

*8  Missouri  Appeals  Reports  522  (1880). 


we  know  of  no  case  in  recent  times  in  which  a  contract  such  as 
the  one  before  us  has  been  declared  illegal." 

Ddph  V.  Troy  Laundry  Machinery  Company.^  The  plaintiff 
and  the  defendant  were  the  two  leading  manufacturers  of  wash- 
ing machines  in  the  United  States.  In  order  to  avoid  the  conse- 
quences of  competition  with  each  other,  and  to  secure  better 
prices  and  larger  returns,  they  had  entered  into  a  five-year  agree- 
ment to  divide  profits.  The  Dolph  concern  was  to  have  the 
option  of  manufacturing  all  machines  sold  by  both  parties,  and 
the  Troy  concern  agreed  to  take  a  certain  number  of  machines 
annually.  The  Troy  concern  having  terminated  the  contract 
prior  to  its  expiration,  the  Dolph  concern  brought  suit  to  recover 
damages.  The  Court  held  the  agreement  valid.  As  its  decision 
seems  to  have  taken  a  different  turn  from  the  great  majority  of 
cases,  we  quote  at  some  length. 

"Assuming  that,  in  entering  into  the  contract,  the  parties 
contemplated  that  the  defendant  should  cease  manufacturing 
machines,  and  buy  all  its  machines  from  the  plaintiff,  and  that 
the  only  purpose  in  view  was  to  promote  the  interests  of  the 
parties,  and  enable  them  to  obtain  from  customers  higher  prices 
for  the  machines,  it  is  not  obvious  how  such  a  contract  con- 
travenes any  principle  of  public  policy.  Washing-machines, 
although  articles  of  convenience,  are  not  articles  of  necessity. 
The  scheme  of  the  parties  did  not  contemplate  suppressing  the 
manufacture  or  sale  of  machines  by  others.  Those  who  might  be 
unwilling  to  pay  the  prices  asked  by  the  parties  could  find  plenty 
of  mechanics  to  make  such  machines,  and  the  law  of  demand  and 
supply  would  effectually  counteract  any  serious  mischief  likely 
to  arise  from  the  attempt  of  the  parties  to  get  exorbitant  prices 
for  their  machines.  It  is  quite  legitimate  for  any  trader  to 
obtain  the  highest  price  he  can  for  any  commodity  in  which  he 
deals.  It  is  equally  legitimate  for  two  rival  manufacturers  or 
traders  to  agree  upon  a  scale  of  selling  prices  for  their  goods,  and 
a  division  of  their  profits.  It  is  not  obnoxious  to  good  morals,  or 
to  the  rights  of  the  public,  that  two  rival  traders  agree  to  consoli- 
date their  concerns,  and  that  one  shall  discontinue  business,  and 

1  28  Fed.  Rep.  553  (1886). 


become  a  partner  with  the  other,  for  a  specified  term.  It  may 
happen,  as  the  result  of  such  an  arrangement,  that  the  public 
have  to  pay  more  for  the  commodities  in  which  the  parties  deal ; 
but  the  public  are  not  obliged  to  buy  of  them.  Certainly,  the 
public  have  no  right  to  complain,  so  long  as  the  transaction  falls 
short  of  a  conspiracy  between  the  parties  to  control  prices  by 
creating  a  monopoly." 

Central  Shade-Roller  Company  v.  Cushman}  Three  manu- 
facturers of  shade-rollers,  each  possessing  different  letters  patent, 
had,  for  the  purpose  of  avoiding  competition,  organized  the 
Central  Shade-Roller  Company,  and  severally  entered  into  an 
agreement  with  it  that  all  sales  of  shade-rollers  should  be  in  the 
name  of  the  Central  Company,  and  should  be  at  once  reported  to 
it.  It  was  further  provided  in  the  agreement  that  the  prices  for 
rollers  of  the  same  grade  should  be  the  same,  the  price  to  be 
according  to  a  schedule  contained  in  the  contract,  subject  to 
changes  made  by  the  company  on  the  recommendation  of 
three-fourths  of  the  stockholders;  and  that  when  either  party  . 
should  establish  an  agency  in  any  city  for  the  sale  of  a  particular 
roller,  no  other  party  should  take  orders  for  the  same  roller  in 
the  same  place.  The  Central  Shade-Roller  Company  alleged 
that  the  defendant  had  broken  the  contract,  and  prayed  for 
an  injimction  to  restrain  the  defendant  from  selling  rollers  in 
violation  thereof. 

The  Court  upheld  the  agreement.  It  held  that  the  contract 
put  no  restraint  upon  the  production  or  sale  of  shade-rollers; 
on  the  contrary  its  apparent  purpose  was,  by  making  prices  more 
uniform  and  regular,  to  stimulate  production.  Moreover,  the 
agreement  did  not  refer  to  an  article  of  prime  necessity,  nor  to  a 
staple  of  commerce,  nor  to  merchandise  to  be  bought  and  sold  in 
the  market,  but  to  a  particular  curtain  fixture  of  the  parties'  own 
manufacture.  Finally,  the  agreement  did  not  aim  to  affect 
competition  from  outside, — the  parties  had  a  monopoly  by  their 
patents, — ^but  only  to  restrict  competition  in  price  among  the  ^ 
members.    Even  if  it  were  true  that  the  agreement  tended  to 

*  143  Massachusetts  353  (1887). 


raise  the  price  of  the  commodity,  it  was,  nevertheless,  one  which 
the  parties  had  a  right  to  make.  But  the  Court  refused  to 
assume  that  the  purpose  and  effect  of  the  combination  was  to 
raise  unduly  the  price  of  the  commodity.  It  held  that  its  natural 
eflFect  would  be  the  maintenance  of  a  fair  and  uniform  price,  and 
the  prevention  of  the  injury  to  producers  and  consimiers  result- 
ing from  fluctuating  prices,  in  turn  the  result  of  undue  competi- 
tion. The  question  would  be  different,  said  the  Court,  if  it 
api>eared  that  the  combination  was  used  to  the  public  detriment. 
The  contract  being  apparently  beneficial  to  the  parties  and  not 
necessarily  injurious  to  the  public,  the  Court  declined  to  hold  it 
invalid  as  a  restraint  of  trade,  or  against  public  policy. 

It  is  doubtful  whether  the  principle  laid  down  in  this  case  is 
sound.  In  United  States  v,  Addyston  Pipe  and  Steel  Company, 
a  federal  court,  discussing  the  shade-roller  case,  said  that  it  was 
there  held  that  contracts  in  restraint  of  trade  are  not  invalid  if 
they  affect  trade  in  articles  which,  though  useful  and  convenient, 
are  not  articles  of  prime  or  public  necessity.  But  "we  think  the 
cases  hereafter  cited  show  that  the  common  law  rule  against 
restraint  of  trade  extends  to  all  articles  of  merchandise."  ^ 

"trustee  device"  cases 

We  now  come  to  the  common  law  cases  dealing  with  trusts. 
These  trusts,  as  we  have  seen,  at  one  time  took  the  form  of  a 
"trust"  agreement  or  a  trustee  device,  but  later  took  the  form  of 
a  corporate  combination.  The  cases  declaring  the  "  trust "  agree- 
ment illegal  will  be  first  considered.^ 

Mallary  v.  Hanaur  Oil-Works,^  This  was  one  of  the  first  cases 
involving  a  "  trust "  agreement.  In  July,  1 884,  four  corporations 
manufacturing  cotton  seed  oil  at  Memphis,  Tennessee,  entered 
into  a  contract.  They  agreed  to  turn  over  to  a  committee,  com- 
posed of  representatives  of  each  corporation,  the  properties  and 

» 85  Fed.  Rep.  286  (1898). 

*  See  also  Pittsburg  Carbon  Company  (Ltd.)  v.  McMillin,  119  New  Yorfc 
46  (1890);  and  Bishop  v.  American  Preservers'  Company,  157  Illinois  284 

'  86  Tennessee  598  (1888). 


machinery  of  each  mill.  These  properties  were  to  be  managed 
for  the  common  benefit  by  the  committee  (it  went  under  the  name 
of  the  "Independent  Cotton-Seed  Association");  and  the  profits 
and  losses  were  to  be  divided  among  the  corporations  according 
to  definite  proportions.  This  arrangement  was  to  last  one  year, 
but  it  might  be  renewed  for  two  additional  years;  and  in  fact  was 
renewed  at  the  end  of  the  first  year.  Prior  to  the  expiration  of 
the  agreement  the  Hanaur  Oil- Works  p>assed  a  resolution  declar- 
ing the  contract  void,  as  being  ultra  vires,  and  directed  its  pres- 
ident to  resume  possession  of  the  mill.  The  association  refused 
to  turn  over  the  mill,  whereupon  suit  was  brought  by  the  Hanaur 
Oil- Works  to  recover  possession. 

The  Court  held  that  the  agreement  entered  into  was  a  con- 
tract of  partnership  between  corporations;  that  the  Hanaur  Oil- 
Works  under  its  charter  had  no  power  to  enter  such  a  partner- 
ship; that  the  contract  was  therefore  void;  and  that  consequently 
the  company  might  resume  possession  of  its  property.  The 
Court  did  not  deem  it  necessary  to  consider  the  question  of  the 
legality  of  such  a  combination  of  corporations  as  one  tending 
to  create  a  monopoly,  though  it  pointed  out  that  the  question 
thus  raised  was  a  grave  one. 

State  V.  Nebraska  Distilling  Company.^  The  Nebraska  Dis- 
tilling Company  had  entered  the  Distillers  and  Cattle  Feeders* 
Trust  in  1887,  but  its  plant,  though  it  had  formerly  been  oper- 
ated at  a  profit,  was  closed  by  order  of  the  trustees.  Subse- 
quently at  a  meeting  of  the  stockholders  of  the  Nebraska  Dis- 
tilling Company  the  directors  were  authorized  to  sell  the 
company's  property,  to  cancel  all  the  stock  outstanding,  and 
to  dissolve  the  corporation.  The  state  thereupon  brought  suit 
to  obtain  a  forfeiture  of  the  corporate  franchise  of  the  company. 
The  Court  held  that  the  object  of  the  Nebraska  Distilling  Com- 
pany in  entering  the  illegal  combination  was  to  destroy  com- 
petition, and  create  a  monopoly;  that  any  contract  entered  into 
with  such  an  object  was,  imder  the  laws  of  the  state,  null  and 
void;  that  the  conveyance  from  the  distilling  company  to  the 
trust  was  in  contravention  of  the  authority  conferred  by  law 

*  29  Nebraska  700  (1890). 


upon  that  company,  in  excess  of  the  powers  granted  by  its 
charter,  and  against  public  policy  and  void;  and  that  no  title  had 
passed  by  such  conveyance.  The  Court  further  held  that  the  cor- 
porate franchise,  having  been  abused,  would  be  annulled;  and 
that  the  property  of  the  Nebraska  Distilling  Company,  being 
within  the  jiuisdiction  of  the  Court,  would  be  disposed  of  in 
such  manner  as  justice  required. 

The  People  of  the  State  of  New  York  v.  The  North  River  Sugar 
Refining  Company }  The  organization  of  the  Sugar  Refineries 
Company  in  1887  has  already  been  described.^  In  1888  the 
Attorney  General  of  New  York  brought  suit  against  the  North 
River  Sugar  Refining  Company,  alleging  that  the  entry  of  the 
company  into  the  trust  justified  the  vacating  of  its  charter. 

The  Court  held  it  that  could  not  be  denied  that  the  North 
River  Sugar  Refining  Company  had  became  an  integral  part  of 
a  combination  which  possessed  over  it  absolute  control.  The 
defendants,  however,  alleged  that  this  outcome  was  the  result 
of  action  by  the  stockholders  and  not  by  the  corporation,  and 
that  therefore  the  penalty  of  dissolution  should  not  be  visited 
upon  the  corporation.  But  the  Court  held  that  there  might  be 
actual  corporate  conduct  without  formal  corp)orate  action.  It 
pointed  out  that  the  stockholders  at  a  meeting  had  unanimously 
adopted  a  resolution  favoring  the  establishment  of  the  "trust", 
and  had  entered  into  an  agreement  to  transfer  their  shares  of 
stock  to  the  trustees.  The  stockholders  in  acting  collectively,  as 
an  aggregate  body,  without  the  least  exception,  had  reached  re- 
sults clearly  corporate  in  character,  and  they  could  not  escape 
the  consequence  of  their  acts  by  pleading  the  innocence  of  a 
convenient  fiction,  that  is,  the  corporation.  It  being  established 
that  the  North  River  Sugar  Refining  Company  had  partici- 
pated in  the  creation  of  the  trust,  it  was  next  necessary  to  deter- 
mine whether  this  was  illegal.  The  Court  held  that  it  was  clear 
that  the  defendant  had  accepted  from  the  state  the  gift  of  cor- 
porate life  only  to  disregard  the  conditions  upon  which  it  had 
been  given;  that  it  had  received  its  powers  and  privileges  merely 
to  put    them    in    pawn;    that  it    had  given  away  to  an  ir- 

*  121  New  York  582  (1890).  *  Cf.  p.  22. 


responsible  board  its  entire  independence  and  self-cx)ntrol. 
Its  stockholders  had  parted  with  the  control  which  the 
charter  gave  them  and  the  state  required  them  to  ex- 
ercise. And  graver  still  was  the  fact  that  the  corporation 
had  helped  to  create  an  anomalous  trust,  which  was  in  substance 
and  effect  a  partnership  of  twenty  separate  corporations;  and  it 
was  a  violation  of  the  law  for  corporations  to  enter  into  a  partner- 
ship. The  Court  therefore  declared  that  the  charter  of  the  com- 
pany should  be  forfeited,  and  its  corporate  existence  annulled. 
The  Court  indulged  in  a  dictiun  as  to  the  injiuious  effects  of 
monopolies  upon  the  public,  but  did  not  decide  the  case  on  that 
groimd,  holding  that  it  was  needless  in  this  instance  "  to  advance 
into  the  wider  discussion  over  monopolies  and  competition  and 
restraint  of  trade  and  the  problems  of  political  economy." 

State  V.  Standard  Oil  Company.^  We  have  already  described 
at  some  length  the  Standard  Oil  "trust"  agreement  of  1882.^ 
The  Supreme  Court  of  Ohio  in  a  decision  rendered  in  1892  de- 
clared the  agreement  illegal.  In  a  line  of  reasoning  similar  to 
that  of  the  New  York  court  in  the  North  River  Sugar  Refining 
Company  case,  it  held  that  the  action  of  the  stockholders  of  the 
Standard  Oil  Company  in  turning  over  their  shares  to  the  trus- 
tees provided  for  in  the  agreement  had  affected  the  property  and 
business  of  the  Standard  Oil  Company  in  the  same  manner  as  if 
it  had  been  a  formal  resolution  of  the  board  of  directors,  and  that 
their  acts  should  be  regarded  as  the  acts  of  the  corporation.  And 
the  nature  of  the  agreement  was  such  as  to  preclude  the  Standard 
Oil  Company  of  Ohio  from  becoming  a  party  to  it.  The  law  re- 
quired that  a  corporation  should  be  controlled  and  managed  by 
its  directors  in  the  interests  of  its  own  stockholders,  and  conform- 
able to  the  purpose  for  which  it  was  created  by  the  laws  of  the 
state.  But  by  the  agreement  entered  into  the  defendant  was 
controlled  and  managed  by  the  Standard  Oil  Trust,  an  associa- 
tion with  its  principal  place  of  business  in  New  York,  and  organ- 
ized for  a  purpose  contrary  to  the  policy  of  the  laws  of  the  state 
of  Ohio.  "Its  object  was  to  establish  a  virtual  monopoly  of  the 
business  of  producing  petroleum,  and  of  manufacturing,  refining 

» 49  Ohio  State  137  (1892).  «  Cf.  p.  19. 


and  dealing  in  it  and  all  its  products,  throughout  the  entire 
country,  and  by  which  it  might  not  merely  control  the  produc- 
tion, but  the  price  at  its  pleasure.  All  such  associations  are  con- 
trary to  the  policy  of  our  state  and  void."  The  Coiut  therefore 
held  that  the  Standard  Oil  Company  should  be  forbidden  to 
carry  out  the  agreement  which  it  had  entered  into  with  the 


The  last  class  of  cases  deals  with  the  establishment  of  corpo- 
rate combinations.^    The  first  of  these  was: 

Richardson  v.  Buhl,^  The  Diamond  Match  Company  was 
organized  in  Connecticut  in  1880  for  the  purpose  of  acquiring  all 
the  factories  in  the  United  States  manufacturing  friction 
matches,  with  the  intent  of  monopolizing  the  business  and 
controlling  prices.  The  companies  which  went  into  the  trust 
exchanged  their  real  estate,  machinery,  patents,  good  will,  and 
agreements  not  to  reenter  the  match  business  for  common  stock 
in  the  Diamond  Match  Company;  and  agreed  to  buy  preferred 
stock  equal  to  one-half  the  amount  of  common  stock  received, 
the  preferred  stock  to  be  paid  for  in  matches  or  match  materials 
on  hand,  or  in  cash.  The  Richardson  Match  Company  not 
being  in  sufficient  fimds  to  buy  the  preferred  stock,  borrowed 
money  from  Buhl,  and  to  secure  the  repayment  of  the  loan 
endorsed  the  greater  part  of  the  preferred  stock  over  to  Buhl, 
with  an  agreement  between  the  parties  as  to  the  division  of  the 
dividends  received  on  the  stock  held  as  collateral.  Suit  was 
brought  by  Richardson  in  connection  with  this  agreement. 

The  parties  to  the  suit  did  not  dispute  the  validity  of  the 
contract  entered  into,  but  the  Court,  on  its  own  motion,  raised 
the  question.  The  Court  held  that  the  contract  had  been 
entered  into  to  aid  the  Diamond  Match  Company  in  carrying 
out  the  object  for  which  it  had  been  organized, — the  monopoli- 
zation of  the  manufacture  of  friction  matches  in  the  United 

'  See  also  People  v.  Chicago  Gas  Trust  Company,  130  Illinois  268  (1889); 
and  Harding  v.  The  American  Glucose  Company,  182  Illinois  551  (1899). 
'  77  Midiigan  632  (1889). 


States.  But  monopoly  in  trade  or  in  any  kind  of  business, 
according  to  the  Court,  was  odious  to  our  form  of  government; 
its  tendency  was  destructive  of  free  institutions,  and  repugnant 
to  the  instincts  of  a  free  people.  The  Diamond  Match  Company 
being  unlawful,  and  the  contract  in  question  having  been  made 
to  further  its  objects  and  purposes,  the  contract  was  void  as 
against  public  policy. 

Distilling  and  Cattle  Feeding  Company  v.  People.^  Reference 
has  been  made  to  the  organization  of  the  Distillers  and  Cattle 
Feeders'  Trust  in  1887.*  In  1890,  because  of  court  decisions 
holding  similar  trusts  illegal,  the  corporate  form  of  organization 
was  adopted.  In  1893  the  Attorney  General  of  IHinois  brought 
suit  against  the  Distilling  and  Cattle  Feeding  Company  (the 
corporation  which  succeeded  the  "trust")*  alleging  that  the 
company  had  misused  its  powers  and  franchises. 

The  Coiut  held  that  no  one  who  intelligently  considered  the 
scheme  of  the  Distillers  and  Cattle  Feeders'  Trust  could  for  a 
moment  doubt  that  it  was  designed  to  be,  and  was  in  fact,  a 
combination  in  restraint  of  trade;  and  that  it  was  organized  for 
the  purpose  of  getting  control  of  the  manufacture  and  sale  of 
all  distillery  products,  so  as  to  stifle  competition,  and  to  be  able 
to  dictate  output  and  prices,  and  thus  to  create  or  tend  to 
create  a  monopoly.  The  "trust"  was  clearly  against  the  policy 
of  the  law,  and  it  was  therefore  illegal  and  void.  And  the 
corporation  had  merely  succeeded  to  the  trust.  Its  operations 
were  to  be  carried  on  in  the  same  way,  for  the  same  purposes, 
and  by  the  same  agencies  as  before.  The  former  trustees 
became  the  directors  of  the  new  corporation,  and  the  trust 
certificate  holders  became  its  stockholders.  The  trust  being 
repugnant  to  public  policy  and  illegal,  it  was  impossible  to 
see,  said  the  Court,  why  the  same  was  not  true  of  the  corpora* 
tion  which  succeeded  to  it  and  took  its  place.  The  control  over 
the  distillery  business  of  the  country,  over  production  and 
prices,  and  the  virtual  monopoly  formerly  held  by  the  trust,  were 
in  no  degree  changed  or  relaxed.  The  Court  concluded,  "There 
is  no  magic  in  a  corporate  organization  which  can  purge  the 

» 156  Illinois  448  (1895).  *Cf.  p.  ai. 


trust  scheme  of  its  illegality,  and  it  remains  as  essentially 
opposed  to  the  principles  of  sound  public  policy  as  when  the 
trust  was  in  existence.  It  was  illegal  before,  and  is  ill^al  still, 
and  for  the  same  reasons."  *  The  judgment  of  the  court  below 
ousting  the  company  from  its  franchises  was  therefore  affirmed. 

The  cases  outlined  in  this  chapter  illustrate  fairly  the  deci- 
sions of  the  courts  of  the  country,  which  almost  without  excep- 
tion have  held  ill^al  all  agreements  in  unreasonable  restraint  of/ 
trade,  and  all  monopolies  or  attempted  monopolies,  irrespective' 
of  the  form  in  which  they  were  clothed.  The  decisions  of  the 
courts  declaring  illegal  the  trust  agreements  in  the  cotton  seed 
oil,  whisky,  sugar,  oil,  and  preserving  industries,  and  the  corpo- 
rate combinations  in  the  match  and  whisky  industries  apparently 
left  no  loophole  under  the  common  law  for  the  establishment  of 
industrial  monopolies. 

We  may  now  proceed  to  describe  the  federal  legislation  deal- 
ing with  combinations  and  trusts,  and  the  decisions  of  the  courts 
interpreting  this  legislation. 

^  156  Illinois  491. 



^  During  the  years  1882  to  1887  a  number  of  trusts  had  been 
created.  This  movement  toward  industrial  monopoly  was 
viewed  with  great  concern  by  the  people  of  the  United  States, 
and  a  vigorous  demand  was  made  for  the  enactment  of  legisla- 
tion that  would  definitely  rfiake  these  trusts  illegal.  As  Justice 
Harlan  said  in  191 1 :  "All  who  recall  the  condition  of  the  coimtiy 
in  1890  will  remember  that  there  was  everywhere,  among  the 
people  generally,  a  deep  feeling  of  imrest.  The  Nation  had  been 
rid  of  human  slavery — ^fortunately,  as  all  now  feel — ^but  the  con- 
viction was  universal  that  the  coxmtry  was  in  real  danger  from 
another  kind  of  slavery  sought  to  be  fastened  on  the  American 
people,  namely,  the  slavery  that  would  result  from  aggregations 
of  capital  in  the  hands  of  a  few  individuals  and  corporations 
controlling,  for  their  own  profit  and  advantage  exclusively,  the 
entire  business  of  the  country,  including  the  production  and  sale 
of  the  necessaries  of  life. "  ^  In  1888  both  of  the  leading  political 
parties  referred  in  their  platforms  to  the  dangers  inherent  in 
trusts,  and  demanded  action.  Thus,  the  platform  of  the  Re- 
publican party  read:*! 

"We  declare  our  opposition  to  all  combinations  of  capital, 
organized  in  trusts  or  otherwise,  to  control  arbitrarily  the 
condition  of  trade  among  our  citizens;  and  we  recommend  to 
Congress  and  the  state  legislatures,  in  their  respective  jurisdic- 
tions, such  legislation  as  will  prevent  the  execution  of  all  schemes 
to  oppress  the  people  by  undue  charges  on  their  supplies,  or  by 
unjust  rates  for  the  transportation  of  their  products  to  market."  ' 

>  For  a  more  detailed  account  of  the  legislation  of  this  period,  see  Knauth, 
The  Policy  of  the  United  States  towards  Industrial  Monopoly. 

*  221  U.  S.  83. 

•  McKee,  The  National  Conventions  and  Platfonns  of  all  Political  Parties, 
p.  241. 



The  Democratic  party  platform  held  that  "  the  interests  of  the 
people  are  betrayed  when,  by  unnecessary  taxation,  trusts  and 
combinations  are  permitted  to  exist,  which,  while  unduly  en- 
riching the  few  that  combine,  rob  the  body  of  our  citizens  by 
depriving  them  of  the  benefits  of  natural  competition."  ^  In  the 
same  year  investigations  of  trusts  were  provided  for  by  the 
House  of  Representatives  and  by  the  state  of  New  York;  and 
numerous  bills  dealing  with  combinations  and  trusts  were  intro- 
duced in  the  United  States  Senate.  The  opposition  to  trusts 
crystallized  in  1890  in  the  passage  on  July  2  of  the  Sherman 
Anti-trust  Act, — as  it  Is  generally  called. 

The  coiurse  of  the  act  through  Congress  has  been  described 
elsewhere,^  and  only  a  brief  sketch  need  be  given  here.  The  bill 
was  introduced  in  the  Senate  by  Senator  Sherman  of  Ohio  on 
December  4,  1889.  It  was  debated  on  February  27,  March  21, 
March  24-27,  and  April  8, 1890.  TDuring  the  course  of  the  debate 
Senator  George  stated  his  belief  that  "the  sentiment  that  some- 
thing ought  to  be  done  pervades  this  body  almost  universally; "  ^ 
and  it  is  significant  as  supporting  this  view  that  only  one  speech 
in  opposition  to  anti-trust  legislation  was  delivered  in  the  Sen- 
ate.^ J  Having  been  revised  so  completely  that  it  bore  little  re- 
semblance to  the  original  measiu-e,  the  bill  passed  the  Senate 
on  April  8,  by  a  vote  of  fifty-two  to  one,  twenty-nine  being 
absent.*  On  May  i  the  bill  was  taken  up  in  the  House,  and 
after  a  short  debate  was  passed  with  one  amendment,  the  votes 
not  being  recorded.^  The  House  amendment  did  not  prove  ac- 
ceptable to  the  Senate,  and  accordingly  a  conference  became 
necessary.  Eventually  on  Jime  20  by  a  vote  of  242  to  o,  85 
not  voting,  the  House  agreed  to  withdraw  its  amendment.^   The 

*  McKee,  The  National  Conventions  and  Platforms  of  all  Political  Parties, 

P-  235. 

'Walker,  History  of  the  Shennan  Law^  chs.  1-2,  and  Knauth,  The 

Policy  of  the  United  States  towards  Industrial  Monopoly,  ch.  i. 

'  Cong.  Record,  March  25,  1890,  p.  2598. 

*  Ibid.,  March  24,  1890,  pp.  2565-66. 

*  Ibid.,  April  8,  1890,  p.  3153. 

*  Ibid.,  May  i,  1890,  p.  4104. 

^  Ibid.,  June  20,  1890,  p.  6312. 


bill  was  signed  by  President  Harrison  on  JiJy  2 ;  and  in  its  final 
form  was  identical  with  the  measure  as  it  had  passed  the  Senate 
on  April  8. 

The  provisions  of  the  act  may  be  briefly  simmiarized  (the  text 
is  given  in  a  footnote).^ 

^  An  act  to  protect  trade  and  commerce  against  unlawful  restraints  and 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United  States  of 
America  in  Congress  assembled y 

Sec  I.  Fvftiy  rontri^ti  Qpmhinatmn  in  the  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  among  the  several  States,  or 
with  foreign  nations,  is  hereby  degjared  to  be  illegal.  Every  person  who  shall 
malcq  fli^y  si\c\\  contract  or  eyage  in  any  such  combination  or  conspiracy, 
ttliftH  fy  ^<H>mpd  ginfty  ofa^misciemeanor,  and,  on  conviction  thereof,  shall  be 
punished  by  fine  not^cee3ing  tove  thousand  dollars,  or  by  jnaprisoninent  not 
exceediQg_one  year,  ot  by  boih  ssdll^unisliments,  in  the  discretion*oF  the 

Sec.  2.  Every  person  who  shall  mpnopolizer  or  at^tepfipt  tn  monojyjizi*^  or 
combine  or  conspire  with  any  other  person  or  persons,  to  monopolize  .gny 
partjglJJieJbrade  or  commerce  among  the  several  States,  or  with  foreign 
nations^  shaU  be  deemed  guilty  of  a  misdemeanor,  and,  on  conviction  thereof, 

jll^hft  piiniRhftd  hy  fine  not  exce^f^jng  fivf  thnnotinH  Hnllnrgj  or  by  imprison- 
ment i)s2teS££fiding^one^eaE^r  by  both  said  punishments,  in  the  discretion 
of  the  court. 

Sec.  3.  Every  contract,  combination  in  the  form  of  trust  or  otherwise,  or 
mngpirary^  in  n^frg^jnt  pf  tradejojrcomnierce  in'any"Territoiyof  the  United 
States  or  of  the  District  of  Columbia.^or  in  restraint  of  trade  orcommerce 
between  any  such  Territory  and  another^  or  between  any  such  Territory  or 
Territoriffl  ?b^  ^"y  State  or  States  or^e  District  of  Coluinbia,  or  with 
focgigiU2ati(>ns,  or  between  the  District  of  Columbia  and  any  State  or  States 
or  foreign  nations,  is  hereby  declared  illegal.  Every  person  who  shall  make 
any  such  contract  or  engage  in  any  such  conoBination  or  conspiracy,  shall  be 
deemed  guilty  of  a  misdemeanor,  and,  on  conviction  thereof,  shall  be  pun- 
ished by  fine  not  exceeding  five  thousand  dollars,  or  by  imprisonment  not 
exceeding  one  year,  or  by  both  said  punishments,  in  the  discretion  of  the 

Sec.  4.  The  severaUarniit  r^n'-tg  '^f  tbe  United  States  are  hereby  invested 

wifh  jii^^irtmn  t,^  prevent  anr^  rg?*^rftin  violations  of  t^hisartj  and  it  shall  be 
the  duty  of  the  several  dittrirt  attomtyrs  of  the  TTnittd  Statp^,  jn  their 
respectivejiistricts,  under  the  direction  of  the  Attomey-GenerajLto  institute 
pny^eBIn^jn  eguity  to  prevent  and  restrajn^guch  violatioi^r~Such  pro- 
ceedings may  be  by  way  of  petition  setting  forth  Uie  case  and  praying  that 
such  violation  shall  be  enjoined  or  otherwise  prohibited.    When  the  parties 


Section  one  ded^pffi  ^^^'^^  t^Mpry  r^Qntrart^  combination  in  the 
form  of  trust  or  otherwise,  or  conspiracy,  in  restraint  of  interstate 
or  foreign  conmierceT^d  provides  a  penalty.  Section  two  is 
directed  against  monopolizing,  or  attempting  to  monopolize, 
any  part  of  the  trade  or  commerce  among  the  several  states,  or 
with  foreign  nations;  andT>rovides  a  penalty.  Section  three 
declares  illegal  every  contract,  combination  in  the  form  of  trust 
or  otherwise,  or  conspffa;C5r7tIl  restraint  of  trade  or  commert:r* 
in  any  Territory  of  the  tTmteir  States  or  in  the  District  of  Colum- 
bia, and  likewise  any  such  contract,  etc.,  in  restraint  of  trade  or 
commerce  between  any  two  territ6ries,  or  between  any  territory 

oomplained  of  shall  have  been  duly  notified  of  such  petition  the  court  shall 
proceed,  as  soon  as  may  be,  to  the  hearing  and  detemination  of  the  case;  and 
pending  such  petition  and  before  final  decree,  the  court  may  at  any  time 
make  such  temporary  restraining  order  or  prohibition  as  shall  be  deemed 
just  in  the  premises. 

Sec.  5.  Whenever  it  shall  appear  to  the  court  before  which  any  proceeding 
imder  section  four  of  this  act  may  be  pending,  that  the  ends  of  justice  require 
that  other  parties  should  be  brought  before  the  court,  the  court  may  cause 
them  to  be  summoned,  whether  they  reside  in  the  district  in  which  the  court 
is  held  or  not;  and  smbpoenas  to  that  end  may  be  served  in  any  district  by 
the  marshal  thereof. 

Sec  6.  Ap^  property  owned  under  any  contract  or  by  any  combination, 
or  pursuant  to  any  conspyacv  (and  being  the  subject  thereof)  mentioned  in 
section  one  of  this  act,  and  being  in  the  course  t)f  transportation  from  one 
Stat^  to  another,  or  to  a  foreign  coimtry^  shall  be  forfeited  to  the  United 
Stetea^  anfl  may  \y^.  seized  and  condemned  by  like  proceedings  as  those  pro- 
^At^tA  \}y  |nw  f/M-  tho  f/^rfpiHirp^  seizure,  and  condemnation  of  property 
imported  into  the  United  States  contrary  to  law. 

Sec  7.  Any  person  who  shall  be  injured  in  his  business  or  property  by  any 
other  person  or  corporation  by  reason  of  anything  forbidden  or  declared  to 
be  milawful  by  this  act,  may  sue  therefor  in  any  circuit  court  of  the  United 
States  jn  the  district  in  which  the  defendant  resides  or  is  found,  without 
respect  to  the  amount  in  controversy,  and  shall  recover  three  fold  the  dam- 
ages by  him  sustained,  and  the  costs  of  suit,  including  a  reasonable  attorney's 

Sec  8.  That  the  word  "person,"  or  "persons,**  wherever  used  in  this  act 
shall  be  deemed  to  include  corporations  and  associations  existing  under  or 
authorized  by  the  laws  of  either  of  the  United  States,  the  laws  of  any  of  the 
Territories,  the  laws  of  any  State,  or  the  laws  of  any  foreign  country. 

Approved,  July  2,  1890. 

26  Statutes  ^t  Large,  pp.  209-210. 




and  the  District  of  Columbia,  or  between  either  of  these  juris- 
dictions and  any  stateor  any  jor^pTngflon.  The  same  penalty 
as  in  sections  one  and  two  is  providedT^ection  four  invests 
the  circuit  courts  of  the  United  States  with  jurisdiction  to  en- 
force the  law,  and  provides  that  the  federaJLgQvemment  may 
institute  proceedings  in  equity  to  prevent  and  restrain  any  vio- 
lations thereof.  Section  five  authorizes  the  courts  to  summon 
before  them  parties  other  than  the  defendants^lf  suSi  seems  to 
be  necessary  to  effect  justice.  Section  six  authorizes  (he  seizure 
and  condemnation  of  property  owned  under  any  contract  or  by 
any  combination,  etc.,  prohibited  in  section  one,  and 'being 
transported  in  interstate  or  foreign  commerce.  Section  seven 
confers  upon  per5Cn?iBjTBi|d  by  the  violation  of  the  law  the  right 
to  sue  the  offending  party  flw:  treble  damages  and  the  costs  of 
the  suit.  Section  eight  provuhsthat  the  word  per^n  as  used 
in  the  act  shall  be  deemed  to  inckhk  corporations  and  associa- 
tions, no  matter  where  incorporated. 

For  nearly  a  quarter  of  a  century  after'^^SQo  the  Sherman  Act 
remained  on  the  statute  books  unamended,  xjot  until  1914  did 
Congress  again  give  the  subject  of  trust  legislatfen  the  consider- 
ation that  its  importance  demanded,  and  proceed  w^xemedy  the 
defects  disclosed  by  experience  and  judicial  interpretathsm.  Such 
legislation  dealing  with  trusts  as  was  enacted  in  the  meiintime 
was  mainly  directed  toward  supplementing  the  Shennan  Act,  in 
minor  particulars.  ^^ 

/  The  first  addition  to  the  Sherman  Act  came  in  1894  as  a  part\ 
of  the  Wilson  tariff  bill,  which  became  law  on  August  27, 
without  receiving  President  Cleveland's  signatiu'e.  Section  73  of 
this  law  provided  in  substance  that  every  combination,  con^jir- 
ac^  trugt,  agreement,  or  contra9t  was  illegal,  when  made  Ay  or 
between  two  or  rnnr^  pprsnng  ^r  mrpprgy^^'ons,  either  of  whom 
waS-Cngaged  in  importing  any  article  into  the  United  States,  and 
when  intended  to  operate  in  restraint  of  lawful  trade,  or  free  com- 
petition in  lawful  trade,  or  to  increase  the  market  price  in  the 
United  States  of  any  article  imported  into  the  United  States,  or 
of  any  manufacture  into  which  such  imported  article  entered.' 

»  28  Statutes  at  Large,  p.  570.    Sections  74,  75,  76,  and  77  of  the  W93on 



Provision  was  made  for  a  penalty  (fine,  or  fine  and  imprisonment) 
and  for  the  seiziire  and  condemnation  of  the  property  imported 
into  the  United  States  contrary  to  law. 

Between  1804  and  iqo.^  no  further  anti-trust  legislation  was 
enacted  by  the  national  govemipent.     The  decision  of  the  Su- 
preme Court  in  theXnight  ca^  ^  in  January,  1895,  greatly  limit- 
ing, as  it  then  seemed,  the  ^ectiveness  of  tfie  Sherman  Act, 
might  well  have  led  to  furtherTegiStation.    But  this  decision  not 
only  limited  the  effectiveness  of  the  Sherman  Act,  but  seemed  to 
call  into  question  the  very  power  of  the  federal  government  to 
deal  effectively  with  trusts.     Confronted  with  this  decision 
President  Cleveland,  who  viewed  the  organization  of  trusts  with 
grave  concern,  turned  to  the  states  as  best  able  to  provide  the 
necessary  relief.^    He  might,  to  be  sure,  have  reconmiended  a 
constitutional  amendment  increasing  the  powers  of  the  federal 
government,  yet  this  suggestion  would  not  have  been  acceptable 
to  his  party.    Indeed  it  is  not  improbable  that  many  members  of 
his  party  actually  welcomed  the  decision  in  the  Knight  case,  since 
it  seemed  to  bolster  up  the  doctrine  of  state  rights, — a  doctrine 
dearer  then  than  now  to  good  Democrats.    No  matter  how  deeply 
concerned  they  might  be  over  the  establishment  of  trusts — the 
problem  was  by  no  means  as  serious  at  that  time  as  it  became 
shortly  thereafter — one  could  hardly  expect  the  members  of  the 
Democratic  party  in  the  middle  nineties  to  support  a  constitu- 
tional amendment  that  would  give  to  the  federal  government  the 
power  which,  by  the  decision  in  the  Knight  case,  it  apparently 

In  1897  the  Republican  party  again  returned  to  power.  The 
platform  of  this  party  in  1896  had  made  no  reference  to  trusts 
except  a  statement  to  the  effect  that  the  true  American  policy  of 
protection  is  "equally  opposed  to  foreign  control  and  domestic 
monopoly; "  *  and  one  could  thus  perhaps  hardly  have  looked  for 

tariff  act  were  substantially  identical  with  sections  4,  5,  6,  and  7,  respec- 
tively, of  the  Shennan  Act  of  i8qo. 
» See  p.  388. 

*  See  Richardson,  Messages  and  Papers  of  the  Presidents,  pp.  744-745. 

•  McKee,  op.  dt.,  p.  30c. 



y  any  trust  legislation  from  this  party  at  that  time.  As  a  matter 
of  fact  the  attention  of  the  Republican  party  during  President 
McKinley's  first  term  was  mainly  directed  toward  tariff  legisla- 
tion, the  war  with  Spain,  and  the  currency  situation. 

Not  until  the  closing  years  of  the  nineteenth  century,  how- 
ever, did  the  trust  problem  reach  a  really  acute  stage.  The  or- 
ganization of  numerous  trusts  to  cover  fields  formerly  quite  com- 
petitive created  an  entirely  new  situation.  In  the  face  of  this 
situation  President  McKinley  in  December,  1899,  in  his  annual 
message  to  Congress,  took  up  the  subject  of  trusts.  He  said  in 
part:  "Combinations  of  capital  organized  into  trusts  to  control 
the  conditions  of  trade  among  our  citizens,  to  stifle  competition, 
limit  production,  and  determine  the  prices  of  products  used  and 
consimied  by  the  people,  are  justly  provoking  public  discussion, 
and  should  early  claim  the  attention  of  Congress.  ...  It 
is  imiversally  conceded  that  combinations  which  engross  or  con- 
trol the  market  of  any  particular  kind  of  merchandise  or  conmiod- 
ity  necessary  to  the  general  conununity,  by  suppressing  natural 
and  ordinary  competition,  whereby  prices  are  unduly  enhanced 
to  the  general  consumer,  are  obnoxious  not  only  to  the  conmion 
law  but  also  to  the  public  welfare.  .  .  .  Whatever  power 
the  Congress  possesses  over  this  most  important  subject  should 
be  promptly  ascertained  and  asserted."  ^ 

Early  in  1900,  also,  the  Industrial  Commission,  which  had 
been  appointed  in  1898  to  investigate  trusts  and  monopolies, 
inter  alia,  made  its  preliminary  report,  recommending  more  de- 
tailed supervision  over  industrial  corporations  engaged  in  inter- 
state operations.  The  testimony  before  this  conunission  and  the 
publication  of  its  report  focussed  popular  attention  upon  this 
subject.  The  state  of  the  public  mind  at  this  time  is  indicated  in 
the  fact  that  the  Republican  party,  which  had  hardly  referred  to 
trusts  in  its  platform  in  1896,  inserted  in  its  platform  in  1900 
this  clause: 

"We  recognize  the  necessity  and  propriety  of  the  honest  coop- 
eration of  capital  to  meet  new  business  conditions,  and  especially 
to  extend  our  rapidly  increasing  foreign  trade;  but  we  condemn 

*  Cong.  Record,  December  5,  iSqq,  p.  25. 


all  conspiracies  and  combinations  intended  to  restrict  business, 
to  create  monopolies,  to  limit  production,  or  to  control  prices, 
and  favor  such  legislation  as  will  effectively  restrain  and  prevent 
all  such  abuses,  protect  and  promote  competition,  and  seciwe  the 
rights  of  producers,  laborers,  and  all  who  are  engaged  in  industry 
and  commerce."  ^ 

Much  more  vigorous  denunciation  of  trusts  was  made  in  the 
platform  of  the  Democratic  party,  as  is  shown  by  the  following 

"Private  monopolies  are  indefensible  and  intolerable.  They 
destroy  competition,  control  the  price  of  all  material  and  of  the 
finished  product,  thus  robbing  both  producer  and  consimier. 
They  lessen  the  employment  of  labor  and  arbitrarily  fix  the  terms 
and  conditions  thereof,  and  deprive  individual  energy  and  small 
capital  of  their  opportunity  for  betterment.  They  are  the  most 
efBdent  means  yet  devised  for  appropriating  the  fruits  of  indus- 
try to  the  benefit  of  the  few  at  the  expense  of  the  many,  and  un- 
less their  insatiate  greed  is  checked,  all  wealth  will  be  aggregated 
in  a  few  hands  and  the  republic  destroyed. 

"  We  pledge  the  Democratic  party  to  an  unceasing  warfare  in 
nation,  state  and  city  against  private  monopoly  in  every  form. 

"  Tariff  laws  should  be  amended  by  putting  the  products  of 
trusts  upon  the  free  list,  to  prevent  monopoly  under  the  plea  of 

"  We  condemn  the  Dingley  Tariff  Law  as  a  trust-breeding 
measure,  skillfully  devised  to  give  the  few  favors  which  they  do 
not  deserve  and  to  place  upon  the  many  biwdens  which  the] 
should  not  bear."  ^ 

To  satisfy  the  popular  demand  for  trust  legislation,  a  number 
of  bills  were  introduced  in  Congress  in  1900.  One  of  the  prin-  ^ 
dpal  legislative  proposals  was  a  constitutional  amendment  to 
give  Congress  adequate  power  to  deal  with  trusts  and  to  maintain 
an  open  field  for  competition  in  industry.  This  measm-e  received 
a  comfortable  majority  in  the  House,  but  failed  to  secxu^e  the  two- 
thirds  requisite  for  a  constitutional  amendment,  and  thus  came 

>  McRee,  op.  cit.,  pp.  342-343. 
*  Ibid.,  pp.  334-336. 


to  naught.^  Doubtless  a  partial  explanation  of  the  failure  of 
this  amendment  is  the  fact  that  the  decision  of  the  Supreme  Court 
in  the  Addyston  Pipe  case,  rendered  in  December,  1899,  had 
made  it  clear  that  thq  Sherman  Act  was  more  effective,  and  the 
power  of  the  national  government  more  extensive,  than  had 
theretofore  been  supposed.^ 

The  constitutional  amendment  having  failed  of  passage,  the 
House  immediately  took  up  consideration  of  a  bill  to  amend  the 
Sherman  Act.  This  bill  was  quite  drastic,  proposing  among 
other  things  to  deny  the  privilege  of  interstate  transportation  to 
manufacturing  concerns  organized  for  the  purp)ose  of  monopo- 
lizing the  manufacture  or  sale  of  articles  of  commerce,  or  of  in- 
creasing or  decreasing  their  price  with  the  intent  of  preventing 
competition  in  their  manufacture  or  sale.^  In  the  opinion  of  the 
committee  that  reported  out  the  bill  the  measure  fully  exhausted 
the  power  of  Congress  to  control  combinations  and  trusts  by 
penal  legislation.  The  bill  was  debated  in  the  House  during  only 
one  day,  and  after  being  amended  so  as  to  exclude  labor  organ- 
izations from  its  prohibitions  was  passed  by  the  House  by  a  vote 
of  274-1.'*  The  sole  dissenting  vote  was  cast  by  Mr.  James  R. 
Mann,  later  the  Republican  leader  of  the  House  of  Represent- 
atives. The  Senate  received  the  bill  on  June  4,  referred  it  to  the 
appropriate  committee,  and  three  days  later  adjourned  sine  die. 
4  i  In  1903  two  laws  dealing  with  tr^g^g  Mrtw-n  pnrmr^  g  The  first 
\)was  an  act  to  exiydite  the^earing  and  detenrnnati^i^  cases 
ari^fri^  under  the  anti-trust  act  and  the  act  to  regulate  com- 
merce.^ u  ^  '^ 

*  Cong.  Record,  June  i,  1900,  p.  6426;  and  H^ose  Report  no.  1501,  56th 
Cong.,  I  St  Sess. 

*See  p.  395. 

'  House  Report  no.  1506,  56th  Cong.,  ist  Sess. 

*  Cong.  Record,  June  2,  1900,  p.  6502. 

*  A  proviso  in  the  Legislative,  Executive,  and  Judicial  Appropriation  Act 
of  February  25, 1903,  granted  immunity  to  persons  testifying  in  suits  brought 
imder  the  an ti- trust  or  interstate  commerce  acts.  32  Statutes  at  Large, 
part  I,  p.  904.  Because  of  the  '* immunity  bath"  dedsbn  (see  p.  485)  this 
immunity  was  limited  in  1906  to  natural  persons  only.  34  Statutes  at 
Large,  part  I,  p.  798. 

•32  Statutes  at  Large,  part  I,  p.  823. 


The  pigposeof  this  bill  was  to  reduce  thf  H^lay  nf  ffip  rryirf^t 

in  settling  important  C^^^  ^riift^'"g  unHpr  thf  anti-tmgf  anH  inf#>r- 

state^mmerce  _acts>  and  to  that  end  it  provided  in  substance 
that  the  circuit  courts  of  the  United  States  must  give  precedence 
to  suits  in  equity  arising  under  these  acts,  when  the  United 
States  was  a  complainant,  and  when  the  Attorney  General 
certified  that  the  suits  were  of  general  public  importance;  and 
it  further  provided  that  appeals  must  be  taken  direct  to  the 
Supreme  Coiu't,  and  within  sixty  days  from  the  entry  of  the 
decree  of  the  lower  court. 

The  second  act  established  an  agency  to  secure  greato  fub- 
lidty  oTthe  affairs  of  indu^ft!  rnrpnrflfj^ns^    ^The  organiza- 
tion  -of-inimerous  trusts  concerning  which  the  public  knew  littjle 
had  naturally  created  a  popular  demand  for  publicity.    Presi- 
dent Roosevelt  in  his  first  annual  message  to  Congress  had  said 
"the  first  essential  in  determining  how  to  deal  with  the  great 
industrial  combinations  is  knowledge  of  the  facts — ^publicity."  ^ 
In  his  second  annual  message  he  had  repeated  this  recommenda- 
tion, saying  that  "publicity  can  do  no  harm  to  the  honest  cor- 
poration; and  we  need  not  be  overtender  about  sparing  the  dis- 
honest corporation."  ^    Congress  yielded  to  his  wishes  in  this 
matter  (his  wishes  were  those  of  the  country),  and  in  February, 
1903,  established,  in  the  newly  created  Department  of  Commerce 
and  Labor,  a  Bureau  of  Corporations,  which,  under  the  direction 
of  the  Secretary  of  Commerce  and  Labor,  was  to  investigate  the 
affairs  of  industrial  corporations  engaged  in  interstate  or  for- 
eign conmierce,  the  President  of  the  United  State  to  determine 
what  part  of  the  information  thus  obtained  should  be  made 
public'    At  the  head  of  the  Bureau  there  was  to  be  a  Com- 
missioner of  Corporations,  appointed  by  the  President,  with  a 
salary  of  $5,000.    He  was  empowered  to  compel  the  attendance 
and  testimony  of  witnesses,  and  the  production  of  dociunentary 
By  the  passage  in  1903  of  the  act  creating  the  Bureau  of  Cor- 

*  Cong.  Record,  December  3,  1901,  p.  83. 
'Ibid.,  December  2, 1902,  p.  7. 

*  32  Statutes  at  Large,  part  I,  pp.  827-828. 


porations,  the  Expedition  Act,  and  the  Elkins  Act  dealing  with 
raihroad  rebates,  the  Republican  party  during  President  Roose- 
velt's first  term  made  distinct  progress  in  anti-trust  legislation. 
Biit  dining  President  Roosevelt's  second  term,  though  he  regu- 
larly referred  to  trusts  in  his  messages  to  Congress,  nothing  what- 
ever was  accomplished.^  Mention  should  be  made,  however,  of 
one  of  his  main  recommendations.  In  his  message  of  1907  Presi- 
dent Roosevelt  had  suggested  that  agreements  among,  or  com- 
binations of,  corporations  be  submitted  to  a  government  body 
for  its  approval.  In  a  special  message  presented  to  Congress  on 
March  25,  1908,  he  took  up  this  matter  in  more  detail.  He 
pointed  out  that  in  the  modem  industrial  world  combinations 
among  business  men  and  laboring  men  were  absolutely  necessary, 
and  they  were  coming  more  and  more  to  be  necessary  among 
farmers.  The  Sherman  Anti-trust  Law,  though  only  partially 
effective  against  vicious  combinations,  had  been  construed  so 
as  to  prohibit  every  combination  for  the  transaction  of  modern 
business.  He  therefore  recommended  that  some  governmental 
authority,  presumably  the  Commissioner  of  Corporations,  be 
authorized  to  pass  on  the  vaUdity  of  contracts  filed  with  it,  and 
if  within  a  definite  time  (say  sixty  days)  the  Commissioner  had 
not  prohibited  such  contract,  it  woiJd  not  be  deemed  to  be 
illegal  unless  in  unreasonable  restraint  of  trade.  ^ 

A  bill  embodying  this  suggestion  was  introduced  in  the  Sen- 
ate on  April  i,  1908,  only  a  week  after  the  reading  of  the  Presi- 
dent's message.  On  January  26, 1969,  the  Committee  on  the 
Judiciary  (to  which  the  bill  had  been  referred)  brought  out  the 
measiu*e,  but  with  an  adverse  report.  The  committee  in  an 
unanimous  report  poijjted  out  that  ^e  effect  of  the  bill  woiJd  be 
to  confer  a  dispensing  power,  a  p<Sfcvrer  of  granting  inmiunity,  on 
a  mere  bureau  head  (the  Commissioner  of  Corporations  for  in- 
dustrial corporations)  or  on  an  administrative  body  (the  Inter- 
state Commerce  Commission  for  railroads),  and  in  both  in- 
stances without  notice  or  hearing, — a  course  of  procedure  that 

*  Except  for  an  amendment  of  the  immunity  provisions.    See  footnote 
to  p.  326. 
2  Cong.  Record,  March  25,  1908,  p.  3854. 


would  not  be  tolerated  in  any  court  in  the  country.  ^  The  Senate 
thereupon  accepted  the  recommendation  of  the  committee  that 
the  bill  be  postponed  indefinitely.^ 

This  bill  was  the  only  one  proposing  to  amend  the  Sherman 
Act  that  was  reported  out  of  committee  diuing  the  period  inter- 
vening between  the  enactment  of  the  1903  legislation  and  the 
close  of  the  Roosevelt  administration  in  March,  1909.  The  only 
tangible  evidence  given  by  Congress  of  interest  in  trusts  was 
in  the  passage  of  several  resolutions  of  investigation.  Among 
these  were  a  joint  resolution,  approved  by  the  President  on 
March  7,  1906,  instructing  the  Interstate  Commerce  Conmiis- 
sion  to  make  examinations  into  the  subject  of  railroad  discrimi- 
nations and  monopolies  in  coal  and  oil;^  a  resolution  of  the  Sen- 
ate directing  the  Attorney  General  to  furnish  it  with  a  statement 
of  all  suits  instituted  by  the  Department  of  Justice  under  the 
Sherman  Anti-trust  Act  and  the  Interstate  Commerce  Law, 
and  the  disposition  made  of  the  suits;  ^  a  resolution  of  the  Senate 
directing  the  Secretary  of  Commerce  and  Labor  to  investigate 
the  causes  of  the  high  price  of  lumber,  and  to  determine  whether 
there  was  a  combination  or  trust  in  the  supplying  thereof;  *^  and 
the  passage  by  the  House  of  a  resolution  to  appoint  a  conmiittee 
to  investigate  the  paper  industry,  and  to  inquire  whether  there 
was  a  paper  combination.* 

William  Howard  Taft  became  President  on  March  4,  1909. 
President  Taft  made  frequent  reference  to  the  trust  question, 
and  recommended  far-reaching  changes  in  our  legislation.  On 
January  7,  1910,  in  a  special  message  to  Congress  on  the  anti- 

'  Senate  Report  no.  848, 60th  Cong.,  2nd  Sess.,  p.  9. 

*Cong.  Record,  January  26,  1909,  p.  1395.  Subsequently  the  Supreme 
Court  of  the  United  States  in  the  Standard  Oil  and  Tobacco  cases  in  191 1  by 
the  enunciation  of  its  "rule  of  reason''  made  the  passage  of  such  a  bill 
unnecessary;  since  these  dedsions,  as  will  be  pointed  out  later,  limited 
the  ^)plication  of  the  Sherman  Act  to  unreasonable  contracts  and  combina* 

*  Cong.  Record,  March  7, 1906,  p.  3440. 

*  Ibid.,  June  25, 1906,  p.  9089. 

'Ibid.,  January  18,  1907,  pp.  i330-i333» ' 
*Il»d.,  April  21,  1908,  p.  5033. 


trust  and  interstate  commerce  laws,  he  expressed  himself  as 
hostile  to  trusts,  and  to  all  schemes  to  stifle  competition  and 
raise  prices.*  His  main  legislative  recommendation  was  the 
enactment  of  a  voluntary  federal  incorporation  law,  and  pro- 
vision by  means  of  this  law  for  the  filing  of  reports  with  the  De- 
partment of  Commerce  and  Labor,  and  for  the  prevention  of 
stock-watering  and  holding  companies  (except  for  special  rea- 
sons approved  by  the  proper  federal  authority).  In  subsequent 
messages  he  renewed  his  reconmiendation  for  a  federal  incorpora- 
tion law,  and  recommended  further  that  a  Federal  Corporation 
Commission,  of  the  dignity  and  power  of  the  Interstate  Com- 
merce Commission,  be  established  to  supervise  the  companies 
taking  out  federal  charters;  that  the  courts  be  empowered  to 
invoke  the  aid  of  this  body  or  the  Commissioner  of  Corpora- 
tions in  drafting  dissolution  decrees;  and  that  price  cutting  to 
eliminate  competitors,  exclusive  contracts,  and  other  kindred 
devices  for  stifling  competition  and  effecting  monopoly  be 
specifically  declared  illegal  and  criminal. 

Despite  President  Taf t's  great  interest  in  anti-trust  legislation, 
and  the  obvious  need  of  action,  only  minor  changes  in  the  law 
dealing  with  trusts  were  made  during  his  administration.  On 
June  25, 1910,  the  Act  to  Expedite  Hearings  (1903)  was  amended. 
The  act  as  amended  provided  that  if  a  member  of  the  circuit 
court  was  necessarily  absent  or  disqualified,  the  justice  of  the 
Supreme  Court  assigned  to  that  circuit  (or  the  other  circuit 
court  judges)  might  designate  some  district  judge  within  that 
circuit  to  sit  in  the  court  at  the  hearing  of  the  suit.^  It  provided 
further  that  any  case  in  which  the  judges  were  imable  to  agree 
on  a  decision  or  order,  instead  of  being  certified  to  the  Supreme 
Court  for  review  as  if  on  appeal,  should  be  retried  before  the 
court,  reconstituted  through  the  appointment  by  the  Chief 
Justice  of  the  Supreme  Court  of  another  circuit  judge  to  sit 
with  the  court  in  the  determination  of  that  particular  case. 

In  1913  a  bill  was  passed  to  provide  for  publicity  in  taking 
^dence  under  the  Sherman  Act.     Senator  Nelson,  who  re- 

*  Cong.  Record,  January  7,  1910,  pp.  381  seq. 

*  36  Statutes  at  Laige,  part  I,  p.  854. 


ported  the  bill,  explained  that  a  smt  had  been  instituted  by  the 
Dqwutment  of  Justice  against  the  Shoe  Machinery  Trust,  and 
that  the  federal  judge  had  ordered  the  testimony  before  the 
master  to  be  taken  behind  closed  doors,  instead  of  before  the 
general  public,  as  was  the  usual  procedure.^  The  purpose  of  this 
bfll,  which  was  recommended  by  the  Department  of  Justice,  was 
to  insure  that  testimony  in  cases  under  the  anti-trust  law  be 
taken  publicly  as  in  open  court.  It  was  passed  by  the  Senate  on 
January  13;  by  the  House  on  March  2;  and  signed  by  President 
Taft  on  March  3.2 

The  remaining  legislation  passed  dining  the  Taft  administra- 
tion was  not  particularly  important.  The  practice  of  espionage 
on  the  business  of  competitors  was  dealt  with  by  a  clause  in  the 
Mann-Elkins  Act  of  1910,  which  provided  that  no  carrier  or  its 
agent  should  disclose  information  concerning  either  the  route, 
destination,  or  consignee  of  any  shipment,  when  such  informa- 
tion might  be  used  to  the  detriment  of  the  shipper,  or  improp- 
erly disclose  his  business  transactions  to  a  competitor.^  The 
soliciting  of  such  information  was  likewise  made  illegaL  An  act 
passed  March  4,  191 1,  making  an  appropriation  for  the  naval 
service  for  the  fiscal  year  ending  June  30,  1912,  provided  that 
"no  part  of  this  appropriation  shall  be  expended  for  the  pur- 
chase of  armor  or  armament  from  any  persons,  firms  or  corpora- 
tions, that  have  entered  into  any  combination,  agreement, 
conspiracy  or  understanding,  the  effect,  object  or  purpose  of 
which  is  to  deprive  the  Government  of  fair,  open  and  unre- 
stricted competition  in  letting  contracts  for  the  furnishing  of 
any  of  said  armor  or  armament. "  ^  The  act  making  appropria- 
tion for  the  fiscal  year  ending  June  30,  1913  (passed  August  22, 
1912),  contained  a  similar  provision,  somewhat  modified  in  its 
phraseology,  which  applied  not  only  to  armor  and  armament, 
but  also  to  structural  steel,  ship  plates,  and  machinery.^ 

*  Cong.  Record,  January  13,  1913,  p.  1434. 

*  37  Statutes  at  Large,  part  I,  p.  731. 

*  36  Statutes  at  Large,  part  I,  p.  553. 

*  Ibid.,  p.  1288. 

» 37  Statutes  at  Large,  part  I,  p.  355. 


The  act  providing  for  the  opening  and  operation  of  the  Pan- 
aiha  Canal,  passed  August  24^  191 2,  contained  a  clause  for- 
bidding the  use  of  the  canal  to  any  ship  owned,  chartered, 
operated,  or  controlled  by  any  person  or  company  that  was 
doing  business  in  violation  of  the  Shennan  Act  of  1890,  or 
sections  seventy-three  to  seventy-seven  of  the  Wilson  TariflF 
Act  of  1894,  or  any  act  amending  or  supplementing  either  of 
these.*  The  question  of  fact  was  to  be  determined  by  the 
courts  upon  the  institution  of  suit  by  the  shipper  or  the  Attorney 
General  against  the  owners  or  operators  of  the  ship.  In  1913 
also  (by  the  passage  of  H.  R.  25002)  sections  73  and  76  of  the 
Wilson  Tariff  Act  of  1894  were  modified  slightly.* 

In  addition  to  these  bills,  a  number  of  resolutions  were 
adopted.  Among  them  were:  a  House  resolution  requesting 
the  President  to  furnish  it  with  information  concerning  a  com- 
bination between  the  United  States  Steel  Corporation  and  its 
subsidiary  companies; '  a  House  resolution  appointing  a  com- 
mittee (Mr.  Hardwick,  chairman)  to  investigate  the  American 
Sugar  Refining  Company;^  a  House  resolution  appointing  a 
committee  (Mr.  Stanley,  chairman)  to  investigate  the  United 
States  Steel  Corporation;  ^  a  Senate  resolution  appointing  a  com- 
mittee (Mr.  Clapp,  chairman)  to  report  desirable  changes  in  the 
laws  controlling  corporations  engaged  in  interstate  commerce;  • 
a  House  resolution  to  investigate  the  money  trust  (Mr.  Pujo 
chairman) ;  ^  and  a  House  resolution  directing  the  Attorney- 
General  to  inform  it  whether  there  was  a  smelter  trust  in  the 
United  States,  including  the  American  Smelting  and  Refining 

*  37  Statutes  at  Laiige,  part  I,  p.  567. 

'  See  37  Statutes  at  Large,  part  I,  p.  667. 
'  Cong.  Record,  June  16,  1910,  p.  8249. 

*  Ibid.,  May  9  191 1,  p.  1147. 
*Ibid.,  May  16,  191 1,  p.  1234. 
•Ibid.,  July  26,  1911,  p.  3226. 
'Ibid.,  February  24, 191 2,  p.  2419, 
'  Ibid.,  March  12,  191 2,  p.  3200. 



As  the  end  of  President  Taf t*s  administration  drew  near  it  be- 
came clear  that  no  important  trust  legislation  would  be  enacted. 
The  Democratic  party  in  the  summer  of  191 2  nominated  Wood- 
row  Wilson  as  its  candidate  for  the  presidency,  and  adopted  a 
platform  promisinjg  warfare  on  industrial  monopoly.  The  plat- 
form repeated  the  old  battle  cry,  "a  private  monopoly  is  indefen- 
sible and  intolerable,"  and  demanded  the  enactment  of  such 
additional  legislation  as  might  be  necessary  to  make  it  impos- 
sible for  a  private  monopoly  to  exist  in  the  United  States.^ 
Legislation  to  prevent  holding  companies,  interlocking  direct- 
orates, price  discrimination,  and  stock-watering  was  urged. 
Regret  was  expressed  that  the  Sherman  Act  through  judicial 
construction  had  lost  much  of  its  eflScacy,  and  legislation  to 
restore  its  eflfectiveness  was  recommended.  Finally,  the  dec- 
laration was  made  that  articles  produced  by  trusts  should  be 
placed  upon  the  free  list.  4^ 

The  Republican  platform  affirmed  the  opposition  of  the  Re- 
publican party  to  special  privilege  and  monopoly;  congratulated 
the  party  upon  the  passage  of  the  Sherman  Act,  and  its  successful 
enforcement;  and  asserted  that  the  party  would  take  no  back- 

>  On  the  trust  legislation  of  1914  see:  Congressional  Record;  Commercial 
and  Financial  Chronicle;  Durand,  The  Trust  Problem,  ch.  5;  Young, 
The  Sherman  Act  and  the  New  Anti-Trust  Legislation,  Journal  of  Political 
Economy,  23,  pp.  201-220,  305-326,  and  417-436;  Stevens,  American 
Economic  Review,  4,  pp.  840-855,  and  5,  pp.  38-54;  Seager,  Political  Science 
Quarterly,  30,  pp.  448-462;  Montague,  The  Federal  Trade  Conmiission  and 
the  Cla)rton  Act,  in  Stetson,  Some  Legal  Phases  of  Corporate  Financing, 
Reoiganization  and  Regulation,  pp.  275-326;  House  Report  no.  627,  63rd 
Omg.,  2nd  Sess.;  Senate  Report  no.  698,  63rd  Cong.,  2nd  Sess. 

*  Campaign  Text  Book  of  Democratic  Party,  191 2,  pp.  2,  6. 



ward  step  to  permit  the  reestahlishment  of  intolerable  con- 
ditions.^ It  advocated  the  enactment  of  supplementary  legis- 
lation defining  as  criminal  those  specific  acts  that  uniformly 
characterized  attempts  to  restrain  and  monopolize  trade,  to  the 
end  that  those  who  desired  to  obey  the  law  might  have  a  guide 
for  their  action,  and  that  those  who  intended  to  violate  it  might 
not  escape  punishment.  Finally,  it  suggested  the  creation  of  a 
federal  trade  commission,  which  would  perform  many  of  the 
functions  then  exercised  by  the  courts. 

More  vigorous  in  tone  was  the  platform  of  the  newly  created 
Progressive  party.  The  trust  plank  of  this  platform,  represent- 
ing the  views  of  the  leader  of  the  party,  urged  the  creation  of  a 
federal  administrative  commission  to  exercise  somewhat  the 
same  degree  of  control  over  trusts  that  the  Interstate  Conmierce 
Conmiission  exercised  over  interstate  railways.^     Tl 

ftinn^  it  Hih;'^^^  ^PPilfPrit  ^^^^  TVffi  |^OOSevelt*S  Utt< 

to  regAat^  trusts — whenever  competition  could  not  be  restoi 
and  to  fix  the  pnces  ot  ttie  articles  produced  by  them_, 
necessary  ^  ^^-^  gposeyelt  favored,  it  is  true,  the  enactment  of 
additional  legislation  to  prohibit  certamunmu-  fpHo  prar^^/vK^ 
such  as  local  price  discnmmation  and  rebates,  the  elimim  ' ' 
of  which,  he  held,  would  lead  to  the  restoration  ot 
in  some  instances;  but  he  differed  fundamental^ 

Democr^tir  flnn    KppnKliVan   r^inHi'rJal^  jp  prnpnsii^fr  fn  r< 

nize  sotne  trusts  as  a  natural  evolution  instead  of  as  a  fraud  on" 

In  the  election  campaign  of  the  fall  of  191 2  the  trust  question 
played  an  important  part.  Probably  the  tariff  and  the  trusts 
received  greater  attention  than  any  other  issues.  But  we  may 
not  conclude  that  the  stand  of  the  respective  candidates  on 
these  issues  determined  the  outcome  of  the  campaign.  What- 
ever the  issues  President  Taft  was  certain  to  be  defeated. 

*  Republican  Campaign  Text  Book,  191 2,  pp.  272-273. 

•  The  platform  may  be  found  in  Roosevelt.  Progressive  Principles,  edited 
by  E.  H.  Youngman,  pp.  314-330.    See  especially  p.  318. 

*See  Outlook,  99,  p.  655  (November  18,  191 1);  and  102,  pp.  105-106 
(September  21,  191 2). 


His  party  had  failed  to  keep  its  promise  to  revise  the  tariflp 
downward,  and  the  acquiescence  of  the  President  in  this  failure 
turned  the  people  against  him.    Already  in  1910  the  capture  of 
the  House  by  the  Democrats  attested  the  failure  of  his  admin- 
istration.   When  there  was  added  to  this  state  of  aflPairs  the 
action  of  the  Old  Guard  in  defeating  the  will  of  the  Republicans 
(as  expressed  in  numerous  primaries),  by  the  nomination  of 
Mr.  Taft  as  their  candidate,  his  defeat  was  made  certain. 
Theodore  Roosevelt,  who  by  the  action  of  the  people  in  the 
primaries  was  entitled  to  the  Republican  nomination,  at  once 
organized  the  Progressive  party, — a  party  which  developed  a 
considerable  strength  because  of  the  popularity  of  its  leader,  the 
program  of  social  justice  for  which  it  stood,  and  no  doubt 
because  of  a  feeling  that  Mr.  Roosevelt  had  been  the  victim  of  a 
fraud.     But  the  result  of  the  election  was  never  in  doubt. 
Woodrow  Wilson  conducted  a  dignified  campaign,  in  which 
personalities  were  not  indulged  in,  confined  himself  largely  to  a 
few  issues  in  which  the  preceding  administration  had  made  a 
signal  failure,  and  received  an  enormous  majority  of  the  elec- 
toral votes.  ^ 
V"  During  the  course  of  the  campaign  Mr.  Wilson  had  promised, 
fiirther  anti-trust  legislation.    As  he  had  said,  "  I  take  my  stand 
absolutely,  where  every  progressive  ought  to  take  his  stand,  on 
the  proposition  that  private  monopoly  is  indefensible  and  intol- 
erable." ^    The  enactment  of  anti-trust  legislation,  however,  was 
to  wait  upon  the  completion  of  two  other  programs, — tariff 
reform  and  banking  reform.    The  Congress  which  was  called  in 
special  session  on  April  7, 1913,  passed  the  Simmons-Underwood 
tarifiF  bill  on  October  3,  1913 — ^a  measure  which,  in  view  of  the 
Democratic  doctrine  that  the  trusts  have  been  promoted  by  the 
tarifiF,  may  be  regarded  as  a  partial  remedy  for  the  trusts — and 
passed  the  Federal  Reserve  Act  on  December  23,  19 13.    The 
decks  were  now  cleared  for  trust  measures. 

The  message  of  the  President  on  trust  legislation  was  delivered 
to  Congress  in  person  oh  January  20,  1914.^    His  trust  pro- 

*  Wilson,  New  Freedom,  p.  172. 

•  Cong.  Record,  January  20,  1914,  pp.  1962-64. 


gram  was  founded  on  the  conviction  that  "private  monopoly 
is  indefensible  and  intolerable," — a  proposition  which  he  held  all 
were  agreed  upon.  He  said  that  we  propose  to  be  the  spokesmen 
of  the  best  informed  men  of  the  business  world,  who  condemn  the 
methods  and  processes  and  consequences  of  monopoly  as  we 
condemn  them.  His  program  was  to  be  a  comprehensive  one, 
but  not  radical  or  unacceptable.  There  was  to  be  "nothing 
essential  disturbed,  nothing  torn  up  by  the  roots,  no  parts  rent 
asimder  which  can  be  left  in  wholesome  combination."  The 
object,  he  said,  was  not  to  unsettie  business,  but  to  pass  laws  to 
be  the  bulwarks  and  safeguards  of  industry  against  the  forces 
that  had  disturbed  it.  The  items  in  this  program  wge:  first, 
laws  that  would  effectually  prevent  such  interlockings  of  the 
personnel  of  the  directorates  of  greatcorporations  as  resulted  in^ 
making  those  i^a  aff ectfid_iSL  compete  in  fact  partners  ^anfll 
masters  of  some  whole  field  of  business.  Such  a  prohibition,  he 
said,  would  bring  new  men,  new  energies,  a  new  spirit  of  initia- 
tive, and  new  blood  into  the  management  of  our  great  business 
enterprises;  it  would  open  the  field  of  industrial  development  and 
origination  to  scores  of  men  who  had  been  obliged  to  serve  when 
their  abiUties  entitled  them  to  direct.  Second,  a  lawjhat. 
'  "'^  iM  r  II  I  HI  I  1  T  '^i^fQip  ^ommerri^  Commission  the 
pn^^r  fn  RiippY|ptend  and  regulate  the  financial  ^pfiratmn*^  j^y 
which  the  railroads  were  henceforth  to  be  supplied  with  the 



mnnpy  thpy  nee^P(\  for  thfir  p^^p^^  d^'^^^^p^pnt     ^"l^h  n  law 

was  to  be  one  step  toward  the  necessary  separation  of  the  busi- 
ness of  production  from  the  business  of  transportation.  TWrd, 
an  <>vpiiVi>  ^^pp^lativf  ^pfini^^^i""  <^f  th^^hcy  and  meaning^oLilifi 
pyisfiny  an tj- trust  law,  a  prohibition  item  by  item  of  the  prac- 
tices  of  monopoly  which  experience  had  disclosed,  in  order  that 

le  condemnation  of 

^  lawJrom  an  inability  to  find  out  just  what  the  lawjBSfasr»  Fourth, 
J  the  creation  of  aiTlniersiatenTade^commission.  ^ThisBody"^ 

would  not  be  empowered  to  make  terms  with  monopoly  or  to 
assume  control  of  business;  rather  it  was  to  serve  as  an  instru- 
ment of  information  and  publicity,  and  to  assist  in  the  dissolu- 
tion of  concerns  which  had  combined  to  a  degree  inconsistent 



with  the  public  interest  and  the  freedom  of  trade,  jjfth,  the 
pgtftb]i<^)^mpnf  f\i  the  principle  that  penalties  and  punishments 
shoiil^  fall  not  uponbusiness  itselt,  to  its  confusion  and  i 
tio^but  upon  tne  maiviauais  wno  u 



\o  go  nlliiH&  whidr 


le  instrumentalities 

condemned^  Every  act  of  business  is  done  at  the 
command  or  upon  the  initiative  of  some  ascertainable  person  or 
group  of  f)ersons;  and  these  should  be  held  individually  respon- 
sible and  the  punishment  should  fall  upon  them,  not  upon  the  / 
business  organization  of  which  they  made  illegal  use.  Sjxth^  the 
prohibition  of  holding  compani^.  The  President  presented  to  " 
Congress  lor  its  consideration  the  question  whether  we  should 
reqxiire  individuals  owning  stock  in  several  companies  which 
ought  to  be  independent,  but  which  on  accoimt  of  common  stock 
ownership  were  brought  imder  a  common  control,  to  decide  in 
which  of  them  they  would  elect  the  right  to  vote.  Seventh. 
i-abVf  fy[  the  individuals  who  had  been  injiu-ed  by  the  many  dis- 

Indgji^p    flT^d    pirtpyjy^jy^^Hnpy    frir/-^    pf    ^^Tnl^inati^ij.       Private 

individuals  who  claim  to  have  been  injured  by  these  processes 
should  be  given  the  right,  he  held,  to  foimd  their  suits  for  redress 
upon  the  facts  and  judgments  proved  and  entered  in  suits  by  the 
government  when  the  government  had  upon  its  initiative  sued 
the  combinations  complained  of  and  won  its  suit.  It  was  not 
fair,  he  said,  that  the  private  Utigant  should  be  obliged  to  estab- 
lish again  the  facts  which  the  government  had  already  proved. 
Immediately  upon  the  conclusion  of  the  President's  address 
the  House  voted  to  refer  that  part  of  the  message  which  related 
to  a  Trade  Commission  and  to  the  regulation  of  railway  securities 
to  the  Committee  on  Interstate  and  Foreign  Commerce,  and  the 
balance  to  the  Committee  on  the  Judiciary.^  Two  days  later  it 
was  publicly  annoimced  that  the  trust  legislation  would  be  em- 
bodied in  five  separate  bills:  (i)  a  Trade  Commission  bill;  (2)  an 
Interlocking  Directorates  bill;  (3)  a  Definitions  bill;  (4)  a  Trades 
Relations  bill,  dealing  with  unfair  competition;  and  (5)  a  Rail- 
road Securities  bill.*    Shortly  after  these  bills  had  been  made 

'  Coog.  Record,  January  2o»  1914,  p.  1980. 
«Chron.,  98,  p.  273  (January  24,  1914)- 



public,  hearings  upon  them  b^an.    Later  the  five  bills  were 
y    consolidated  into  three:  (i)  the  Trade  Commission  bill;  (2)  the 

,  Clayton  bill,  which  included  the  Interlocking  Directorates  bill 
and  the  Trade  Relations  bill  (the  Definitions  bill  was  dropped) ; 
and  (3)  the  Railroad  Seauities  bill.  This  third  measure,  which 
was  to  give  the  Interstate  Conmierce  Commission  authority 
to  regulate  the  issues  of  securities  by  common  carriers  and  to 
deal  with  interiocking  directorates  among  common  carriers,  was 
designed  to  prevent  the  occurrence  in  the  futiu-e  of  such  scandals 
as  the  Rock  Island  and  New  Haven  episodes.  The  bill  was 
f)assed  by  the  House  on  June  5  by  a  vote  of  325-12,^  but  early  in 
September  the  announcement  was  made  that,  in  view  of  the 
disturbed  conditions  created  by  the  Eiu-opean  War,  the  Presi- 
dent had  consented  to  the  postponement  of  the  measure.  Thus 
was  another  illustration  given  of  the  baneful  effect  of  war  on 
domestic  policies. 
Before  analyzing  in  some  detail  the  two  trust  bills  that  were 

.   enacted  into  law,  we  may  outline  briefly  their  legislative  history. 

\  The  first — the  Trade  Commission  bill  (H.  R.  1 2120)— was  intro- 
duced in  the  House  on  January  22  by  Representative  Clayton, 
and  referred  by  the  House  to  the  Committee  on  Interstate  Com- 
merce.^ At  the  same  time  this  bill  was  introduced  in  the  Senate 
as  S.  4160.  During  the  course  of  the  committee  hearings  it 
became  apparent  that  the  bill  did  not  fully  carry  out  the  ideas  of 
the  President,  and  therefore  Chairman  Adamson  on  February  16 
appointed  a  sub-committee,  of  which  Representative  Covington 
of  Maryland  was  made  chairman,  to  draft  a  new  bill.'  On 
March  14  Mr.  Covington  introduced  in  the  House  a  new  bill 
(H.  R.  1463 1 ),  which  represented  the  imanimous  views  of  the 
sub-committee.^  This  bill  was  referred  to  the  Conmiittee  on 
Interstate  Commerce.  One  month  later  (April  13)  a  new  bill 
(H.  R.  15613),  a  revised  draft  of  the  former  bill,  was  introduced 
by  Representative  Covington,  and  referred  by  the  House  to  the 

*  Cong.  Record,  June  5,  1914,  p.  9912. 

*  Ibid.,  January  22,  1914,  pp.  2142,  2150-1. 
•Chron.,  98,  p.  567  (February  21,  1914). 

*  Cong.  Record,  March  14,  1914,  p.  4886. 


Committee  on  Interstate  Commerce.^  The  next  day  this  com- 
mittee reported  the  bill  to  the  House  without  amendment, 
accompanied  by  a  report  (no.  533).^  The  committee  in  its  report 
stated  that  the  bill  provided  for  a  trade  commission  in  accord- 
ance with  the  views  of  the  President  as  expressed  in  his  message 
to  Congress.  The  bill  was  framed  on  the  principle  of  preserving 
competitive  conditions  in  interstate  commerce;  the  commission 
had  not  been  given  power  to  make  terms  with  monopoly,  to  regu- 
late prices  or  production,  to  declare  any  particular  corporation 
or  agreement  innocuous,  or  to  issue  orders.  The  report  was  con- 
curred in  by  all  the  Democratic  members  of  the  committee  except 
two  who  did  not  believe  the  bill  was  sufficiently  drastic,  and  by 
all  the  Republican  members  of  the  committee;  in  fact  the  prep- 
aration of  the  bill  and  its  coiu*se  through  Congress  were  marked 
by  a  comparative  absence  of  political  considerations,  the  Repub- 
licans cooperating  with  the  Democrats  to  effect  its  passage.  In 
part  this  fortunate  state  of  affairs  was  due  to  the  widespread  de- 
mand for  the  establishment  of  a  commission — the  poll  conducted 
by  the  Chamber  of  Commerce  of  the  United  States  was  eloquent 
testimony  as  to  the  strength  of  this  demand — and  in  part  it  was 
due  to  the  skill  and  courtesy  of  Representative  Covington,  who 
carefully  avoided  stirring  up  antagonisms  or  factional  differences. 
On  May  19  debate  on  the  bill  began  in  the  House.  Amended  in 
only  one  particular  (and  that  a  minor  one),  the  bill  passed  the 
House  on  June  5,  1914.'  The  vote  on  the  measure  was  not 
recorded,  but  that  the  opposition  to  its  passage  was  slight  is 
attested  by  the  fact  that  a  motion  to  recommit  the  bill,  offered  by 
Representative  Murdock  of  Kansas  (a  Progressive),  was  de- 
feated by  a  vote  of  151  to  19.^  (Not  all  of  the  nineteen,  however, 
were  to  be  regarded  as  hostile  to  the  measure,  for  Mr.  Murdock 
himself  stated  that  he  was  not  opposed  to  the  passage  of  the  bill.) 
The  House  bill  was  referred  by  the  Senate  to  the  Committee  on 
Interstate  Commerce;  and  on  June  13  was  reported  from  the 

*  Cong.  Record,  April  13,  1914,  p.  6648. 

*  Ibid.,  April  14,  1914,  p.  6714. 

*  Ibid.,  June  5, 1914,  p.  9910. 


committee.  The  action  of  the  committee  consisted  in  striking 
out  all  of  the  House  bill  except  the  enacting  clause,  and  substitut- 
ing therefor  the  provisions  of  the  Senate  bill  (S.  4160),  with  the 
addition  of  several  sections  dealing  with  imfair  competition  and 
foreign  trade  practices.  On  June  25  the  Senate  took  up  the  con- 
sideration of  this  bill.  Debate  upon  it  occupied  a  large  share  of 
the  Senate's  attention  during  the  month  that  followed,  the 
principal  bone  of  contention  being  the  unfair  competition  provi- 
sions which  had  been  added  to  the  bill  by  the  Senate  Committee. 
On  July  22  the  Democratic  members  of  the  Senate  at  a  caucus 
agreed  that  the  bill  should  be  kept  constantly  before  the  Senate 
imtil  its  final  disposition.^  Finally  on  August  4  a  unanimous 
consent  agreement  was  entered  into  that  the  Senate  would  vote 
on  the  bill  not  later  than  August  5.^  On  that  day  the  bill, 
amended  in  many  particulars,  passed  the  Senate  by  a  vote  of 
53  to  16,  27  not  voting.^  Only  two  Democrats  voted  against  the 
bill  (though  quite  a  number  were  absent)  and  twelve  Republi- 
cans voted  for  it. 

The  House  disagreeing  to  the  amendments  of  the  Senate,  a 
conference  became  necessary.  The  conference  committee 
labored  over  the  bill  for  nearly  a  month,  endeavoring  to  agree 
upon  a  measure  that  would  include  the  fundamental  provisions 
of  both  bills.  On  September  4  the  result  of  their  labors  was 
presented  to  the  Senate  and  to  the  House.  The  conference  report 
was  agreed  to  in  the  Senate  on  September  8  by  a  vote  of  43-5,* 
the  main  features  of  the  debate  being  the  exceeding  difficulty 
experienced  in  maintaining  a  quorum.  The  conference  report 
was  taken  up  in  the  House  on  the  loth.  Representative  Mann  of 
Illinois,  the  leader  of  the  opposition,  expressed  the  prevailing 
sentiment  when  he  said  that  the  discussion  on  the  bill  had  been 
devoid  of  partisan  politics  from  the  start,  and  that  it  was  a  good 
bill.^    The  House  on  the  loth  agreed  to  the  conference  re- 

*  Chron.,  99,  p.  238  (July  25,  1914). 

'  Cong.  Record,  August  4,  1914,  p.  13235. 

*  Ibid.,  August  5,  1914,  p.  13319. 

*  Ibid.,  September  8,  1914,  p.  14802. 

'  Ibid.,  September  10,  1914,  p.  14940. 


port.^     Nothing    now    remained    but    the    signature  of    the 
President;  and  this  was  affixed  on  September  26,  1914. 

The  second  of  the  trust  measures — the  Clayton  bill  (H.  R. 
15657) — ^was  introduced  in  the  House  on  April  14.^  Of  the 
three  tentative  bills  before  the  Committee  on  the  Judiciary  one 
(the  Definitions  bill)  had  been  dropped,  and  the  other  two  had 
been  consolidated.  A  Definitions  bill  had  been  urged  by  Presi- 
dent Wilson  in  his  message  to  Congress,  but  the  objection  was 
raised  that  a  specific  enumeration  of  oflFenses  under  the  act  might 
limit  the  scope  of  the  anti-trust  acts.  The  Attorney  General,  for  / 
example,  expressed  the  opinion  that  a  legislative  definition  of 
offenses  might  weaken  the  act.  Moreover,  it  was  certain  that  it 
would  be  years  before  the  various  offenses  defined  in  the  bill 
would  receive  judicial  interpretation.  Apparently  the  President 
became  convinced  of  the  force  of  these  objections;  and  as  a  re- 
sult the  Definitions  bill  was  dropped.  The  remaining  bills  (the 
Interlocking  Directorates  bill  and  the  Trade  Relations  bill),^ 
with  some  new  matter,  were  consolidated  into  one, — the  Clayton 
bill.  As  one  commentator  has  put  it,  two  separate  measures 
were  better  targets  for  criticism  than  a  single  bill,  and  at  the 
same  time  they  did  not  afford  as  good  a  rallying-ground  for  those 
who  were  willing  to  support  the  administration.^  The  Clayton 
bill  was  referred  by  the  House  to  the  Committee  on  the  Judi- 
ciary. On  May  6  the  bill  was  reported  from  the  committee  with 
an  amendment,  accompanied  by  a  report  (no.  627).*  Debate  on 
the  bill  began  on  May  22.  It  occupied  the  attention  of  the  House 
until  Jime  5,  when  it  was  passed  with  its  amendments  by  a  vote 
of  277  to  54.*  Only  one  Democrat  voted  against  it,  while  forty- 
three  Republicans  and  sixteen  Progressives  voted  for  it.®  In 
spite  of  the  charge  made  against  the  bill  that  it  was  conceived  in 
a  spirit  of  partisanship  in  marked  contrast  to  the  Trade  Commis- 

*  Cong.  Record,  September  10,  1914,  p.  14933. 

*  Ibid.,  April  14, 1914,  p.  6714. 

*  Young,  Journal  of  Political  Economy,  23,  p.  320. 

*  Cong.  Record,  May  6, 1914,  p.  8201. 

*  Ibid.,  June  5,  1914,  p.  991 1. 

*  Chron.,  98,  p.  1814  (June  13,  1914)- 


sion  bill,  it  received  the  support  of  a  large  number  of  Republicans 
and  Progressives. 

The  Clayton  bill  was  presented  to  the  Senate,  and  on  June  6 
referred  to  the  Committee  on  the  Judiciary.  ^  On  the  2  2nd  of  July 
it  was  reported  out  with  amendments  and  with  a  report  (no.  698).* 
Consideration  of  the  bill  by  the  Senate  in  Committee  of  the 
Whole  was  begun  on  August  1 1 ;  and  for  the  next  three  weeks  the 
Senate  concentrated  its  attention  upon  it.  On  September  2  the 
measure,  amended  in  many  vital  particulars,  passed  the  Senate 
by  a  vote  of '46-16.'  The  forty-six  votes  ior  the  measure  were 
cast  by  thirty-eight  Democrats,  seven  Republicans,  and  one 
Progressive.  The  sixteen  votes  in  opposition  were  all  cast  by 

The  amendments  to  the  House  bill  made  by  the  Senate  were 
numerous  and  far-reaching,  and  a  conference  was  therefore 
necessary.  The  report  of  the  conference  committee  was  pre- 
sented to  the  Senate  on  September  23,  read  on  September  26, 
and  taken  up  for  debate  on  September  28.  Vigorous  objection  to 
the  report  was  made,  particularly  by  Senator  Reed  of  Missouri, 
who  held  that  the  teeth  had  been  removed  from  the  bill,  his 
principal  objection  being  the  failure  of  the  conferees  to  retain  the 
criminal  penalties  provided  for  by  the  House.  In  order  to  effect 
the  restoration  of  the  criminal  penalties,  he  made  a  motion  on 
October  5  to  recommit  the  bill  to  conference.  This  was  defeated 
by  a  vote  of  35-25.^  The  Senate  thereupon  by  a  vote  of  35-24 
agreed  to  the  conference  report.^  On  October  7  the  report  was 
taken  up  in  the  House,  and  the  next  day  the  report  was  agreed 
to  by  a  vote  of  245-52.®  The  signature  of  the  President  was 
affixed  on  October  15,  1914,  thus  bringing  to  a  conclusion  the 
anti-trust  legislation  of  the  year.     . 


In  describing  the  provisions  of  the  Trade  Commission  Act 
we  shall  take  up,  first,  the  organization  of  the  Commission; 

*  Cong.  Record,  June  6, 1914,  p.  9929.   *  Ibid.,  October  5,  1914,  p.  161 70. 
•Ibid.,  July  22,  1914,  p.  12468.      'Ibid. 

•  Ibid.,  September  2,  1914,  p.  14610.   •  Ibid.,  October  8, 1914;  p.  16344. 


second,  its  principal  powers  and  duties;  and  thirds  some  miscel- 
laneous provisions. 

Organization  of  (he  Commission 

TtiA  o^f  pT/\^'^g4  for  the  creation  of  a  Federal  Trade  Commis- 
fdon  of  five  y embers  to  be  appointed  by  the  President,  with  the 
advice  and  consent  of  the  SenatCi  I'he  salary  of  each  member^ 
was  fixed  at  a  vear*  and  the  term  of  office  at  seven  yearg; 
except  for  the  first  appointees,  who  were  to  serve  for  tffee, 
four,  five,  six,  and  seven  years,  and  except  for  appointments  to 
fill  vacancies,  in  which  case  the  imexpired  term  was  to  be  filled 
out  Not  more  than  three  of  the  five  commissioners  might  be  • 
of  the  same  political  party.  No  commissioner  might  engage 
in  any  other  business,  vocation,  or  employment.  The  commis- 
sioners might  be  removed  by  the  President  for  inefficiency, 
neglect  of  duty,  or  malfeasance  in  office. 

Upon  the  organization  of  the  Commission  and  the  election  of 
its  chairman,  the  Bureau  of  Corporations  and  the  offices  of  the 
Commissioner  and  Deputy  Commissioner  of  Corporations  were 
to  cease  to  exist;  but  the  Commission  was  to  continue  all  the 
pending  investigations  and  proceedings  of  the  Bureau,  to  retain 
all  the  clerks  and  employees  of  the  Bureau  at  their  former  grades 
and  salaries,  and  ta  take  possession  of  all  the  records,  papers, 
and  property  of  the  Bureau,  including  any  unexpended  funds. 

The  Commission  was  to  appoint  a  secretary  at  a  salary  of 
$5,000  a  year,  and  to  have  authority  to  employ  and  fix  the  com- 
p)ensation  of  such  attorneys,  special  exp>erts,  examiners,  clerks, 
and  other  employees  as  it  might  from  time  to  time  find  neces- 
sary, and  for  whom  Congress  might  from  time  to  time  make 
appropriation.  With  the  exception  of  the  secretary,  a  clerk  to 
each  commissioner,  the  attorneys,  and  the  special  experts  and 
examiners,  all  employees  of  the  commission  were  to  be  a  part 
of  the  classified  civil  service. 

Powers  and  Duties  of  the  Commission 
The  principal  powers  of  the  Commission  may  be  classified 


under  two  heads:  I.  Investigati^:  II.  Thp  p^yf n*^i""  ^^  unfair 
methods  of  competition  in  commerce.^  _ 

[.  The  powers  of  investigation  possessed  by  the  Conmiission 
are  primarily  those  that  relate:  (A),  to  all  corporations^engaged 
in  commerce,  other  than  banks  and  common  carriers;  and  (B), 
to  all  corpontiions  guilty  or  alleged,  to  be-ffiuJi^  of  violating  the 
anH-tgist  |aw<;.  The  first  set  of  powers  obviously  relates  to  a 
larger  nimiber  of  corporations;  but  the  second  setlSates  to  a 
greater  variety,  for  it  includes  not  only  industrial  corporations, 
but  also  banks  and  common  carriers,  which  as  to  their  ordinary 
operations  are  \mder  the  control  of  other  government  bodies. 

A.  The  powers  of  investigation  that  relate  to  those  corpora- 
tions engaged  in  commerce  which  are  within  the  especial  juris- 
diction of  the  Commission  (industrial  corporations)  are: 

(i)  "To  gather  and  compile  information  concerning,  and  to 
investigate  from  time  to  time  the  organization,  business,  con- 
duct, practices,  and  management  of  any  corporation  engaged  in 
conmierce,  excepting  banks  and  common  carriers  subject  to 
the  Act  to  regulate  commerce,  and  its  relation  to  other  corpora- 
tions and  to  individuals,  associations,  and  partnerships.''  ^ 
This  power  is  only  a  little  broader  than  that  possessed  by  the 
Bureau  of  Corporations.  The  main  differences  are  that  the 
Bureau  of  Corporations  in  its  investigations  was  subject  to  the 
direction  and  control  of  the  Secretary  of  Commerce  and  Labor, 
whereas  the  Federal  Trade  Commission  is  not;  that  the  Bureau 
was  not  specifically  authorized  to  investigate  "business" 
and  "practices,**  as  well  as  organization,  conduct,  and  manage- 
ment; and  that  the  authority  of  the  Bureau  included  banks,  while 
that  of  the  Conmiission  does  not. 

(2)  To  require,  by  general  or  special  orders,  the  corporations 
subject  to  its  especial  control  to  file  with  it  "in  such  form  as  the 

^  The  term  commerce  as  defined  in  the  act  means  "conunerce  among  the 
several  States  or  with  foreign  nations,  or  in  any  Territory  of  the  United 
States  or  in  the  District  of  Columbia,  or  between  any  such  Territory  and 
another,  or  between  any  such  Territory  and  any  State  or  foreign  nation, 
or  between  the  District  of  Columbia  and  any  State  or  Territory  or  foreign 

*  Section  six  (a). 


commission  may  prescribe"  annual  or  special  reports,  or  answers 
in  writing  to  specific  questions,  furnishing  to  the  Commission 
such  information  as  it  may  require  regarding  their  organization, 
business,  conduct,  practices,  management,  and  their  relation 
to  other  corporations,  partnerships,  and  individuals.  These 
reports  and  answers  are  to  be  made  under  oath,  or  otherwise, 
as  the  Conmiission  may  prescribe,  and  to  be  filed  within  such 
reasonable  period  as  the  Commission  may  set.^  Any  corpora- 
tion which  fails  to  file  the  annual  or  special  report  within  the 
time  fixed  by  the  Commission  is  subject  to  a  penalty  of  $100  per 
day,  to  be  recovered  by  the  Department  of  Justice,  and  paid 
into  the  Treasury  of  the  United  States.^  Moreover,  any  person 
who  willfully  makes,  or  causes  to  be  made,  any  false  entry  or 
statement  of  fact  in  any  report  made  to  the  Commission,  or  who 
willfully  makes  any  false  entry  in  any  accoimt,  record,  or  memo- 
randum kept  by  any  corporation  subject  to  this  act,  or  who  will- 
fully neglects  to  make  full  and  correct  entries  in  such  accounts, 
etc.,  of  all  transactions  pertaining  to  the  business  of  the  corpora- 
tion, or  who  willfully  removes  out  of  the  jurisdiction  of  the 
United  States,  or  willfully  alters  or  by  any  means  falsifies,  any 
documentary  evidence  of  such  corporation,  is  subject  to  a  fine 
of  not  less  than  $1,000  nor  more  than  $5,000,  or  to  imprison- 
ment for  a  term  not  to  exceed  three  years,  or  to  both  such  fine 
and  imprisonment.*  The  House  and  the  Senate  bills  had  pro- 
vided that  the  Commission  might  prescribe  "as  near  as  may  be  a 
uniform  system  of  annual  reports."  This  was  modified  to  read 
that  these  reports,  including  the  special  reports,  should  be  made 
"in  such  form  as  the  commission  may  prescribe."  In  giving 
the  Commission  power  to  call  for  annual  and  special  reports  the 
Trade  Commission  Act  represents  a  distinct  advance  over  the 
act  creating  the  Bureau  of  Corporations.  In  the  latter  act  there 
was  no  compulsory  power  provided  whereby  the  Biu-eau  could 
obtain  regular  reports,  even  assuming,  what  is  imlikely,  that  the 

^Section six  (b). 
i,    *  Sectkni  ten.    The  penalty  does  not  lie  tintil  thirty  days  after  the  date 
set  by  the  Commission. 
'Section  ten. 


general  powers  of  investigation  conferred  on  the  Bureau  included 
the  power  to  call  for  reports.  But  in  the  Trade  Commission 
Act  the  power  is  specifically  given,  and  a  penalty  is  provided. 

(3)  The  Commission  has  power  to  classify  corporations  from 
time  to  time,  and  to  make  rules  and  regulations  for  the  purpose 
of  carrying  out  the  provisions  of  the  act.^  It  is  not  dear  just 
what  the  significance  of  this  clause  is.  Mr.  Stevens  holds  that 
the  effect  of  this  provision  combined  with  the  power  to  call  for 
reports  is  apparently  to  give  the  Commission  the  power  in  its- 
discretion  to  make  a  classification  of  corporations,  and  then,  if 
the  Commission  deems  it  fitting,  to  prescribe  a  imiform  system 
of  accounting  for  the  reports  of  all  members  of  each  class.^ 

•  However,  neither  the  Commission  nor  the  coiuls  have  as  yet 
passed  upon  the  meaning  of  this  subsection. 

B.  We  come  now  to  those  powers  of  investigation  that  relate 
to  corporations  guilty  or  aUeged  to  be  guilty  of  violating  the 
anti-trust  laws.  To  some  extent  the  powers  to  be  now  considered 
are  broader  than  those  of  mere  investigation,  but  they  may  be 
included  here,  since  they  embrace  in  every  instance  thorough 
investigation.     The  Commission  has  the  following  powers: 

(4)  "Upon  the  direction  of  the  President  or  either  House  of 
Congress  to  investigate  and  report  the  facts  relating  to  any 
alleged  violations  of  the  antitrust  Acts  by  any  corporation."  • 
In  the  House  and  Senate  bills  the  Commission  was  made  subject 
in  this  matter  to  the  direction  of  the  Attorney  General  also,  but 
in  view  of  the  fact  that  the  Attorney  General  was  the  head  of  an 
executive  department,  it  was  concluded  that  the  direction  of  the 
President  would  be  sufficient.  Accordingly  this  provision  was 
eliminated  in  conference.  It  is  expected  that  the  effect  of  this 
clause  will  be  to  transfer  to  the  Commission  much  of  the  work 
of  investigation  formerly  carried  on  by  the  Department  of  Jus- 

(5)  "Upon  the  application  of  the  Attorney  General  to  in- 
vestigate and  make  recommendations  for  the  readjustment  of 

*  Section  ax  (g). 

*  Stevens,  American  Exonomic  Review,  4,  pp.  849-850. 

*  Section  six  (d). 


the  business  of  any  corporation  alleged  to  be  violating  the  anti- 
trust Acts  in  order  that  the  corporation  may  thereafter  main- 
tain its  organization,  management,  and  conduct  of  business  in 
accordance  with  law."  ^  It  will  be  noticed  that  the  Commission 
exercises  this  power  only  upon  the  application  of  the  Attorney 
General,  and  that  the  Attorney  General  is  under  no  compulsion 
to  accept  the  recommendations  of  the  Commission.  Should 
there  be  co<^)eration  between  these  two  bodiefif— as  Congress 
doubtiess  intended — this  provision  will  prove  helpful.^  The 
increasing  activity  of  the  Department  of  Justice  in  recent  years 
has  engendered  in  a  nimiber  of  concerns  the  desire  to  readjust 
their  business  in  such  a  way  as  to  avoid  a  government  suit. 
Having  proven  imsuccessful  in  securing  the  establishment  of  a 
Commission  with  power  to  give  them  an  "immunity  bath," 
i  e.,  to  pass  on  the  reasonableness  of  their  agreements,  these 
concerns  desire  an  assurance  that  they  will  not  be  prosecuted  by 
the  Attorney  General  then  in  office.  This  assurance  they  can 
now  obtain  by  a  readjustment  of  their  a£fairs  in  a  manner  ap- 
proved by  the  Department  of  Justice.  It  is  highly  desirable 
that  these  volimtary  reorganizations  be  promoted,  as  they  effect 
the  desired  end  without  the  delay  and  exp>ense  of  court  proceed- 
ings. And  it  was  the  opinion  of  Congress  that  the  Commission 
was  better  constituted  than  the  Department  of  Justice  to  sug- 
gest a  satisfactory  economic  reorganization,  leaving  to  the  De- 
partment the  acceptance  of  the  plan  as  being  legally  satisfac- 

(6)  Upon  the  request  of  the  court,  and  as  a  master  in  chan- 
cery, to  ascertain  and  report  an  appropriate  form  of  decree 
in  any  suit  in  equity  brought  \mder  the  direction  of  the  Attorney 
General  as  provijled  in  the  anti-trust  acts.'  The  court  may  adopt 
or  reject  the  report  in  whole  or  in  part,  and  may  enter  such  de- 

*  Sect  ton  six  (e). 

'  Down  to  May,  1920,  the  Attorney  General  had  called  upon  the  Commis- 
sion for  recommendations  only  twice:  once  in  the  case  of  certain  news  print 
manufacturers,  and  once  in  the  case  of  the  California  Raisin  Association. 
Correspondence  with  Federal  Trade  Commission. 

*  Section  seven. 


cree  as  it  judges  proper.  This  provision,  should  the  courts  take 
advantage  of  it,  will  prove  distinctly  helpful.  The  formulation 
of  a  decree,  particularly  a  dissolution  decree,  is  an  exceedingly 
difficult  matter, — one  calling  for  skill,  judgment,  and  detailed 
technical  knowledge  of  the  industry  inv81ved.  The  exigencies 
of  the  situation  may  require  that  the  trust  be  split  up  into  a 
nimiber  of  separate  imits.  These  units  must  not  be  so  laige 
as  to  make  competition  between  them  unlilyely;  nor  must  they 
be  so  small  as  to  sacrifice  efficiency.  The  problem  is  thus  pri- 
marily economic,  rather  than  legal  ,^  and  tfie  provision  for  the 
preparation  of  a  decree  by  the  Trade  Commissijm  is  an  indication 
that  Congress  recognized  this  to  be  the  4ase.^  ^Should  the  coiuls 
invoke  the  aid  of  the  Commission,  it  is  uijUkelv  that  dissolution 
decrees  as  ineffective  as  those  in  the  oil  ,and  A)liacco  cases  will 
be  again  entered.  It  is  true  that  the  Attorn^  General  invoked 
the  aid  of  the  Biu-eau  of  Corporations  in  *Ae  dls^lution  of  the 
tobacco  trust,  and  that  the  principal  expe^  ofiiJthe  Bureau  re- 
ported that  the  distribution  of  business  imd^r  the  plan  was 
economically  satisfactory.^  Yet  there  is  consid^able  difference 
between  an  official  of  the  Bureau  acting  exti^-omcially  and  five 
Trade  Commissioners  performing  a  service  ^)iecifically  provided 
for  in  the  law,  in  order  that  earlier  farces  may  not  be  repeated. 
However,  to  date  *  the  courts  have  not  availdd^  themselves  of  the 
benefits  of  this  section.  ^ 

(7)  "Whenever  a  final  decree  has  been  tnteied  against  any 
defendant  corporation  in  any  suit  brought  by  tjie  United  States 
to  prevent  and  restrain  any  violation  of  the  dntkrust  Acts,  to 
make  investigation,  upon  its  own  initiative,  of  Ate  manner  in 
which  the  decree  has  been  or  is  being  carried  out,mnd  upon  the 

*  Attorney  General  Wickersham  in  his  Annual  Repbrt  for  191 1  (p.  6) 
stated  that  the  problems  involved  in  working  out  the  tobacco  dissolution 
plan  were  economic  rather  than  legal,  and  admitted  that  neither  the  courts 
nor  the  Department  of  Justice  were  properly  equipped  to  work  out  such 
problems,  save  in  exceptional  cases.  ^ 

*  Annual  Report  of  the  Attorney  General,  191 1,  p.  7.  ^ 

*  May,  1920.  In  the  glucose  case  a  bwer  court  requested  the  Commissbn 
to  prepare  a  dissolution  decree;  but  the  case  was  appealed,  and  the  Commis- 
sion did  not  actually  prepare  a  decree. 


application  of  the  Attorney  General  it  shall  be  its  duty  to  make 
such  investigation.  It  shall  transmit  to  the  Attorney  General 
a  report  embodying  its  findings  and  reconmiendations  as  a 
result  of  any  such  investigation,  and  the  report  shall  be  made 
public  in  the  discretion  of  the  commission."  ^  This  provision 
was  taken  from  the  House  bill,  except  that  in  that  bill  the  Com- 
mission was  required  to  investigate  on  its  own  initiative  into  the 
observance  of  the  decree,  whereas  in  the  act  the  Commission  is 
required  to  investigate  only  upon  the  request  of  the  Attorney 
General.  This  function  is  one  that  was  formerly  exercised  by 
the  Department  of  Justice,  but  especial  legislative  provision 
for  its  exercise  by  the  Commission  either  on  its  own  initiative 
or  upon  the  initiative  of  the  Department  of  Justice  will  doubtiess 
cause  it  to  be  performed  more  regularly  and  conscientiously. 

(8)  "To  investigate,  from  time  to  time,  trade  conditions  in 
and  with  foreign  countries  where  as3ociations,  combinations, 
or  practices  of  manufactjiu:ers,  merchants,  or  traders,  or  other 
conditions,  may  affect  the  foreign  trade  of  the  United  States, 
and  to  report  to  Congress  thereon,  with  such  reconmiendations 
as  it  deems  advisable."  ^ 

(9)  To  make  public  from  time  to  time  such  portions  of  the 
information  obtained  by  it,  except  trade  secrets  and  the  names 
of  customers,  as  it  shall  deem  expedient  in  the  public  interest; 
and  to  make  annual  and  special  reports  to  Congress,  and  to  sub- 
mit therewith  recommendations  for  additional  legislation;  and 
to  provide  for  the  publication  of  its  reports  and  decisions.' 
The  ability  of  the  Commission  to  determine  for  itself  what  in- 
formation it  shall  make  public,  rather  than  have  the  matter 
determined  by  the  President,  gives  it  added  prestige.  It  is  to 
be  hoped  that  the  Commission  will  make  public  all  the  informa- 
tion it  seciffes  that  bears  on  the  trust  question.  The  trusts 
can  no  longer  plead  the  sacro-sanct  character  of  their  business; 

^  Section  six  (c). 

*  Section  six  (h).  Acting  under  the  authority  granted  by  this  section 
the  Commissbn  undertook  and  has  completed  (1916)  an  investigation  of 
Coopeiutkm  in  American  Export  Trade. 

*  Section  six  (0. 


this  business  has  reached  such  dimensions  as  to  cause  them  to  be 
imbued  with  a  public  interest.  If  they  are  not  public  service 
corporations,  as  that  phrase  is  technically  used,  neither  are  they 
private  institutions.  The  annual  reports  to  Congress  making 
recommendations  for  additional  legislation  will  imdoubtedly 
influence  the  future  coiu*se  of  trust  legislation,  just  as  the  recom- 
mendations of  the  Interstate  Commerce  Commission  have  in- 
fluenced the  trend  of  railway  legislation.  No  doubt  the  experi- 
ence of  the  Interstate  Commerce  Commission  with  the  railwa)rs 
made  Congress  siu-er  of  its  ground  in  the  creation  of  a  Trade 
Commission,  yet  that  experience  afforded  no  complete  parallel. 
The  Trade  Commission  deals  with  a  much  larger  nimiber  of 
corporations,  pursuing  diverse  businesses;  and  it  is  established 
to  restore  and  preserve  competitive  conditions  rather  than  to 
fix  the  charges  for  service  performed  by  corporations  that  are 
generally  recognized  as  patural  monopoUes.  Under  these  cir- 
cumstances it  is  imdoubtedly  better  that  the  country  should 
proceed  siu^ely,  even  if  it  seems  to  be  proceeding  slowly;  for  if  /j 
progress  is  siu-e,  the  goal  is  likely  to  be  sooner  attained.  ^ 

II.  In  addition  to  its  powers  of  investigation,  the  Commis- 
sion has  power  over  unfair  methods  of  competition.^  Section  five 
declares  that  "unfair  methods  of  competition  in  commerce  are 
hereby  declared  unlawful."  ^  The  Commission  is  then  directed 
to  prevent  persons,  partnerships,  or  corporations  (except  banks, 
and  common  carriers  subject  to  the  acts  to  regulate  commerce) 
from  using  unfair  methods  of  competition  in  commerce.  The 
remaining  provisions  of  this  section,  dealing  largely  with  pro- 
cedure, may  be  enimierated  seriatim,  (i)  If  the  Commission 
has  reason  to  believe  that  any  person,  partnership,  or  corpora- 
tion (save  those  excepted  above)  has  been  or  is  using  any  unfair 
method  of  competition  in  commerce,  and  if  it  shall  appear  to 
the  Commission  that  a  proceeding  by  it  would  be  in  the  interest 
of  the  public,  it  shall  serve  upon  such  person,  firm,  or  corpora- 
tion a  complaint  stating  its  charges,  and  containing  a  notice  of  a 

^  For  a  definition  of  commerce  as  used  in  the  act  see  p.  344. 
» On  the  subject  of  unfair  competition,  see  the  report  of  the  Bureau  of 
Corporations  on  Trust  Laws  and  Unfair  Competition. 


hearing  to  be  held  at  least  thirty  days  after  the  service  of  the 
complaint.    (2)  The  party  complained  of  shall  have  the  right 
to  appear  at  the  time  fixed  and  show  cause  why  an  order  should 
not  be  entered  requiring  it  to  desist  from  the  violation  of  the  law 
as  charged  in  the  complaint.    (3)  Other  parties  may  be  allowed 
by  the  C(»nmission  to  intervene  and  appear  in  the  proceedings 
by  counsel  or  in  person.    (4)  If  upon  such  hearing  the  Conmiis- 
sion  shall  be  of  the  opinion  that  the  method  of  competition  in 
question  is  prohibited  by  the  act,  it  shall  make  a  written  report! 
in  which  it  shall  state  its  findings  as  to  the  facts,  and  it  shall' 
order  such  corporation  to  desist  from  using  such  method  of  com- 
petition.   (5)  If  the  order  is  not  obeyed,  the  Commission  may 
apply  to  the  circuit  coiut  of  appeals  of  the  United  States,  within 
any  circuit  where  the  method  of  competition  in  question  was 
used  or  where  such  corporation  carries  on  business,  for  the  en- 
forcement of  its  order.    (6)  Upon  the  filing  of  the  application 
and  of  the  transcript  of  record,  the  court  shall  have  jurisdiction 
of  the  proceeding,  and  shall  have  power  to  make  an  order  affirm- 
ing, modifying,  or  setting  aside  the  order,  of  the  Commission. 
(7)  The  findings  of  the  Conmiission  as  to  the  facts,  if  supported 
by  testimony,  shall  be  conclusive.    (8)  If  either  party  shall  apply 
to  the  court  for  leave  to  adduce  additional  evidence,  and  shall 
show  to  the  satisfaction  of  the  coiut  that  such  additional  evi- 
dence is  material  and  that  there  were  reasonable  grounds  for 
the  failure  to  adduce  such  evidence  in  the  proceeding  before 
the  Commission,  the  coiut  may  order  such  additional  evidence 
to  be  taken  before  the  Commission.    (9)  By  reason  of  the  addi- 
tional evidence,  the  Commission  may  modify  its  findings  as 
to  the  facts,  or  make  new  findings,  which  findings,  if  supported 
by  testimony,  shall  be  conclusive;  and  the  Commission  shall 
file  its  findings  and  its  recommendation,  if  any,  for  the  modifi- 
cation or  setting  aside  of  its  original  order.    (10)  The  judgment 
and  decree  of  the  court  shall  be  final,  except  that  an  appeal 
may  be  taken  to  the  Supreme  Coiut  upon  certiorari  as  provided 
in  section  two  himdred  and  forty  of  the  Judicial  Code.    (11) 
Any  party  required  by  an  order  of  the  Commission  to  desist 
from  using  an  unfair  method  of  competition  may  obtain  a  re- 


view  of  this  order  in  the  aforesaid  drcuit  court  of  appeals  by 
filing  a  written  petition  asking  that  the  order  of  the  Commission 
be  set  aside.  (By  this  provision  the  party  complained  of  need 
not  wait  for  the  Conunission  to  act;  it  can  proceed  upon  its 
own  accoimt  to  test  the  validity  of  the  Commission's  order.) 
(12)  The  Commission  upon  being  served  with  a  copy  of  this 
petition  shall  file  in  the  court  a  transcript  of  the  record  as  above 
provided.  (13)  Upon  the  filing  of  the  transcript  the  coiut  shall 
have  the  same  jurisdiction  of  the  proceeding  as  in  the  event  of  an 
application  by  the  Commission  for  the  enforcement  of  its  order. 
(14)  The  jurisdiction  of  the  drcuit  coiut  of  appeals  of  the  United 
States  to  enforce,  set  aside,  or  modify  orders  of  the  Commission 
shall  be  exclusive.  (This  is  true  whether  the  initiative  in  bring- 
ing the  order  of  the  Conunission  into  coiu-t  be  taken  by  the 
Commission  or  by  the  party  complained  of.)  (15)  The  pro- 
ceedings in  the  circuit  coiu^t  of  appeals  shall  be  given  precedence 
over  all  other  cases  pending  therein,  and  shall  be  in  every  way 
expedited.  (16)  No  order  of  the  Commission  or  judgment  of 
the  Court  to  enforce  the  same  shall  in  any  wise  relieve  or  absolve 
any  person,  partnership,  or  corporation  from  any  liability  under 
the  anti-trust  acts. 

The  Senate  bill  had  declared  unlawful  "  unfair  competition." 
The  objection  had  been  raised  in  the  course  of  the  debate  in  the 
Senate  that  the  term  was  too  vague;  that  business  men  would 
not  know  what  in  law  was  " fair  "  and  what  was  "unfair."  Even 
Representative  Covington  stated  that  when  the  proposition  to 
prohibit  "unfair  competition"  was  first  mooted  in  the  House  he 
believed  that  the  phrase  was  too  vague  to  be  enforced.^  But 
further  reflection  and  study  convinced  him  as  well  as  most  of  the 
other  doubters  that  the  phrase  had  a  definite  significance  in  the 
decisions  of  the  courts;^  and  the  bijl  passed  the  Senate  in  this 
form.  In  the  conference  committee  there  was  substituted  for 
"unfair  competition"  the  words  "unfair  methods  of  competi- 
tion." This  change  was  made  upon  the  insistence  of  the  House 
conferees.    Senator  Cimunins,  who  had  introduced  the  unfair 

*  Cong.  Record,  September  10,  1914,  p.  14928. 

*  On  unfair  competition,  see  Nims,  Unfair  Business  Competition. 


competition  section  in  the  Senate,  in  discussing  the  action  of  the 
conference  committee,  said  that  the  two  terms  in  his  judgment 
meant  exactly  the  same  thing,  though  he  regretted  the  change, 
since  the  term  "unfair  competition*'  was,  in  his  opinion,  better 
understood  at  law  than  the  term  "unfair  methods  of  competi- 
tion." Representative  Covington,  chairman  of  the  House  con- 
ferees, in  explaining  the  conference  report,  cited  numerous  cases 
to  show  that  there  was  a  well-defined  class  of  declarations  by 
the  courts  defining  "unfair  methods  of  competition," — ^many 
more  than  there  were  in  1890  to  indicate  the  meaning  of  the 
words  "contracts  in  restraint  of  trade,"  as  found  in  the  Sherman 
Act.  But  to  meet  the  objection  that  the  meaning  of  the  law  was 
uncertain  it  was  provided  that  no  penalties  should  lie  against  the 
initial  violation  of  this  prohibition;  penalties  were  to  operate 
onlv  after  the  order  of  the  Commission  to  desist  from  the  use  of 
any  particular  unfair  competitive  device  had  been  affirmed  by 
the  courts.  In  order  that  meanwhile  the  use  of  unfair  competi- 
tive methods  might  not  prove  disastrous  to  the  complainant, 
provision  was  made  for  the  expeditious  determination  of  the 
matter  by  the  courts. 

The  Senate  bill  had  required  the  Commission  to  act  whenever 
it  had  reason  to  believe  that  any  person  or  concern  was  resorting 
to  unfair  competition.  The  conference  committee  added  a 
proviso  that  the  Commission  should  act,  "  if  it  shall  appear  to  the 
conmiission  that  a  proceeding  by  it  in  respect  thereof  would  be 
to  the  interest  of  the  public."  As  Representative  Clayton 
pointed  out  in  explaining  the  conference  report,  this  proviso  was 
inserted  to  prevent  the  Commission  from  becoming  a  clearing 
house  for  the  settlement  of  everyday  quarrels  of  competitors  in 
matters  which  were  free  from  detriment  to  the  public,  and  which 
ought  to  be  settled  through  the  courts.  ^  To  compel  the  Commis- 
sion to  take  up  every  instance  of  an  "unfair  method  of  competi- 
tion" would  hamper  it  in  effecting  a  speedy  redress  of  those 
particular  unfair  competitive  methods  which  tended  to  bring 
about  monopoly,  and  which,  were  they  not  straightway  enjoined, 
might  mean  ruin  to  the  independent  manufacturers.  Unless 
'  Con^.  Record,  Septonber  10,  1914,  p.  14930. 


we  are  to  have  confidence  in  the  good  faith  of  the  Commission 
in  determining  when  the  public  interest  is  concerned,  it  had 
been  better  never  to  have  established  such  a  body.  It  is  particu- 
larly important,  however,  that  the  Conunission  act  in  good  faith, 
since  the  initiative  in  preventing  unfair  competition  under  this 
act  can  be  taken  only  by  it;  the  Department  of  Justice  can  not 
institute  a  suit  to  restrain  unfair  methods  of  competition;  nor 
can  the  Court  entertain  such  a  suit 

An  important  change  was  also  made  in  conference  in  the 
nature  of  the  court  review  of  the  Commission's  orders.  The 
Senate  bill  had  provided  that  the  Commission  might  bring  a 
suit  for  the  enforcement  of  its  orders  in  the  district  court  of  the 
appropriate  district  (the  party  against  whom  the  order  had  been 
given  might  do  the  same).  In  order  to  avoid  the  delay  of  the 
lower  courts,  it  was  provided  in  conference  that  the  circuit  court 
of  appeals  should  have  initial  jurisdiction  of  cases  relating  to  the 
orders  of  the  Commission,  and  that  the  circuit  court  should 
expedite  the  cases  in  every  way  possible.  The  controversy  in 
the  Senate  between  the  advocates  of  a  "broad  review"  of  the 
Commission's  orders  and  a  "narrow  review"  resulted  in  a  victory 
for  the  former.  The  advocates  of  a  "broad  review"  contended 
that  the  Trade  Commission  Act  would  be  unconstitutional  unless 
it  provided  for  a  broad  review  of  the  Conmiission's  orders  by  the 
courts.  A  narrow  review  of  the  orders  of  the  Interstate  Com- 
merce Conunission  had  been  held  to  be  constitutional,  it  was 
true;  but  this  conunission  exercised  legislative  power — the  power 
to  prescribe  the  rates  to  be  charged  in  the  future — and  the  courts 
can  not  interfere  with  constitutional  exercise  of  legislative  power. 
But  the  Federal  Trade  Conunission  was  to  have  no  legislative 
power;  it  was  to  have  no  power  to  prescribe  fair  methods  of 
competition.  It  was  to  possess  merely  the  judicial  power  to  order 
the  discontinuance  of  an  unfair  method  of  competition;  and 
imder  the  Constitution  the  power  to  act  finally  in  a  judicial 
capacity  can  be  exercised  only  by  a  court  The  conclusion  of 
the  Commission  as  to  the  facts  was  conclusive,  but  its  decision 
that  the  facts  found  constituted  a  violation  of  the  law  had  in  the 
nature  of  the  case  to  be  reviewed  by  the  court.    Not  imtil  the 


order  of  the  Commission  was  sustained  did  any  penalties  lie,  and 
even  if  the  Commission  was  sustained,  there  were  no  penalties 
unless  the  order  of  the  court  was  disobeyed.  In  that  event  the 
penalty  would  be  imposed  for  contempt  of  court. 

The  "unfair  competition"  provisions  of  the  Trade  Commission 
Act  should  prove  very  important.  The  study  of  individual 
trusts  made  earlier  in  this  book  has  made  it  clear  that  unfair 
comi>etitive  methods  have  proved  a  powerful  weapon  in  the 
hands  of  the  trusts  to  destroy  competing  enterprises  and  to 
discourage  potential  competitors.  In  so  far  as  the  trusts  main- 
tain their  position  by  the  use  of  such  tactics,  the  determined 
exercise  b